House of Commons - Scottish Affairs

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Select Committee on Scottish Affairs First Report

FIRST REPORT

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

THE DRINKS INDUSTRY IN SCOTLAND:

ISSUES AND CONCERNS

1. When we decided on our inquiry we wanted to explore the relative importance to Scotland of all the drinks sectors: bottled water, brewing, soft drinks and distilling. A long and enthralling investigation has been interrupted by the expectation that the dissolution of Parliament will be announced soon. To complete our programme we had planned to hold two further evidence sessions involving Ministers and officials from: the Ministry of Agriculture, Fisheries and Food, HM Customs and Excise, the Department of Trade and Industry, the Scotland Office and HM Treasury. We then anticipated some lengthy deliberative sessions as we considered the complex issues that had emerged. Sadly, we are now unable to finish the job to the extent we would have liked.

2. To provide some proper conclusion to our inquiry and perhaps to assist our successors, we should briefly like to highlight some of the more significant areas of interest and concern that have been illustrated to us.

3. During the inquiry we received over 40 written memoranda. We held six oral evidence sessions at the House, involving: the British Soft Drinks Association; representatives of bottled water companies; the Scotch Whisky Association; the Brewers' and Licenced Retailers' Association; Scottish & Newcastle plc; The Scottish Council Development and Industry; The Belhaven Brewery Company Ltd; The Gin and Vodka Association of Great Britain; the Institute for Fiscal Studies; Mr John McFall MP; Diageo plc; the Scottish Trades Union Congress; Scottish Enterprise; the Scottish Environment Protection Agency; Greater Glasgow Health Board and the Alcohol and Health Research Centre. Full details are on page iv.

4. It is our custom also to talk informally to as many interested parties as possible connected with a given inquiry. Consequently, we undertook a series of visits to Glasgow, Dumbarton, Islay, Beauly, Speyside and Cumbernauld, in order to further our investigation. A list of those we met can be found on page xiii.

5. We also decided to visit the European Commission in Brussels and the World Trade Organization in Geneva to discuss at first hand some of the issues that had been raised with us for which the EU and the WTO has responsibility. These included: excise duty differentials, smuggling, export refunds and the implications of EC Directives related to water and waste; and matters pertaining to trading arrangements, for example access to markets and tariff barriers.

6. We are grateful to all those who contributed to the success of our visits. We should like to offer special thanks to both HE Nigel Sheinwald CMG, UK Permanent Representative to the European Union and HE Simon Fuller CMG, UK Permanent Representative to the Office of the United Nations and other international Organisations in Geneva and their staff for the constructive and diligent way they helped our endeavours in Europe.

7. We were fortunate that our efforts received the invaluable assistance of Mr Stewart Dunlop, Research Fellow, Fraser of Allander Institute, University of Strathclyde, whose expertise allowed us more easily to understand the issues of concern.

8. Let other poets raise a fracas,

'Bout vines, an' wines, an drunken Bacchus,

An' crabbit[8] names an stories wrack[9] us,

An' grate[10] our lug:[11]

I sing the juice Scotch bear[12] can mak' us,

In glass or jug.

9. The anthem to the "water of life"[13] contained in Robert Burns' Scotch Drink is indicative of the historic importance and reputation of Scotch whisky. The spirit, which international law requires can only be distilled in Scotland, is known and admired the world over. It is a major export earner for the UK. Scotch whisky as a product gives emphasis to the quality aspect of Scotland as a brand: a place of origin which denotes and guarantees the very best.

10. When we decided to undertake the inquiry, we were, of course, well aware of the standing of Scotch whisky and the contribution it has made to both the Scottish and the UK economy. The whisky industry has recently been responsible for crediting £2 billion per year to the balance of trade; 90 per cent of sales are exports.[14] It contributes over £1.6 billion annually in excise duty and VAT.[15] The industry currently has 10,000 direct and 20,000 indirect employees[16] and spends £1 billion a year with local suppliers.[17]

11. What we were less certain about was to what extent the role and significance of the whisky industry had changed over recent years, particularly when direct employment in the industry had fallen quite considerably and ownership had, by and large, passed into the possession of a small number of multi-national companies where decisions involving the development of the whisky industry were now taken outside of Scotland.

12. Moreover, we were in no doubt of the nature of some of the serious problems faced by whisky distillers. The comparatively high level of UK duty and the consequential increase in cross-border shopping and smuggling, the European Union minimum rates arrangement which has helped create these conditions, trade and trade barriers, and the higher tax on spirits compared to other types of alcohol, all feature strongly in the whisky producers' premier league of complaints. These areas are reserved issues, which, following devolution, fall within our remit.

13. As the inquiry progressed we learned of the growing importance to Scotland of white spirit production. It is estimated that currently "some 75 per cent of UK gin and vodka is produced in Scotland".[18] This is an important benefit conferred by consolidation in the distilling industry and the rationalisation of production and bottling. Clearly, levels of duty on spirits will influence whether or not Scotland can in future retain its grip on the level of white spirit manufacture. Unlike the distinct and special Scotch whisky, gin (with the exception of Plymouth gin) and vodka have no "geographical designation" and can be produced anywhere in the world.[19] Much cheap white spirit is now being distilled in Europe. The fastest growing line in London gin is made in Poland.[20]

14. Bottled water, notably that bottled in Scotland, is a growth industry. In 1999 Scotland produced 35 per cent of the total production of bottled water and supplied 25 per cent of UK bottled water consumption.[21] Areas of concern raised with us included the suggested consumer confusion over definitions of bottled water (of which there are three: natural mineral water, spring water and table water). In other countries in the EU there is tighter control for example over what might be designated as "spring water". This matter and the possible competitive threat of "engineered" water to the purer natural mineral water, which is more expensive, exercised some witnesses.[22] We would have liked to explore the argument further.

15. The question of water abstraction also arose. Both bottled water producers and the whisky industry were anxious about the implications of a licensing regime similar to that operating in England and Wales, being developed in Scotland, in compliance with European Commission requirements through the Water Framework Directive. The argument was that Scotland is a water-rich nation. Any attempt to impose undue control on industries which by the very nature of their business were environmentally aware, would be costly, bureaucratic and unnecessary. The Scottish Environment Protection Agency on the other hand believed that climate change was leading to summer drought and overuse of some water courses in certain parts of Scotland. It thought that licensing was important in these areas. The Scottish Environment Protection Agency also considered that the registration of water users was a useful tool which could work to the advantage of the users themselves.

16. Soft drinks production in Scotland has been in decline since the end of the Second World War. The only major intrinsically Scottish company operating on the world stage is A G Barr, who produce Irn Bru. Witnesses from the British Soft Drinks Association talked to us about some of the regulatory burdens on the industry in Scotland and noted the inevitable additional transport costs that businesses there have to cope with. We were disappointed to learn that there were now no manufacturers of cans or plastic bottles located in Scotland.[23]

17. An indirect problem associated with soft drinks which was drawn to our attention in written evidence from Laura Sinfield,[24] was the price of non-alcoholic drinks in public houses. The Government was aware and concerned about the matter[25] and had established that the difference in the price of soft drinks between supermarkets and off-licences on the one hand and pubs and restaurants on the other was greater than for beer and wine. Seventy per cent of pubs did not display prices adequately.[26]

18. Scotland is home to a number of small brewers, including the Caledonian Brewery Company, Belhaven Brewery Company Limited (both gave oral evidence to us) and the Orkney Brewery. Scottish and Newcastle plc, an important brewer and multi-national company is also based in Scotland. They too appeared before us. There was consensus between large and small on the iniquities of tax differentials in the EU, particularly between France and the UK, which lead to increased participation in cross-border shopping and to an increase in smuggling operations and illegal sales of alcohol, often involving children.

19. We were pleased to see that the 2001 Budget statement proposed to cut tax rates for smaller brewers, leading to a progressive system of excise duty based on annual output. This idea was put to us in evidence from the Belhaven Brewery Company Limited.[27] Such a development must be a fillip for small brewers, although what will ultimately be defined as a small brewer has yet to be decided.

20. The small brewers we spoke to differed on the impact of the growth in Scotland of the so-called super pubs, whose commercial clout was forcing discounted prices beyond the reach of the smaller outfits. The progressive duty rate to which we refer in the preceding paragraph might go someway to changing the circumstances of those currently excluded. The dynamics here could, without the time constraints forced upon us, have benefited from further analysis.

21. All of the witnesses from all of the sectors laid stress on the weight of the regulatory burden to which they were subject. Environmental measures, including the Climate Change Levy, featured large. There did indeed appear on the surface of it to be some queer anomalies attached to the eligibility for rebates of the Climate Change Levy, which are linked to the use of animal, vegetable or dairy products in manufacturing. For example, bottled water producers who limited themselves solely to that item were ineligible. Those who added flavouring qualified for rebates because of their use of the fruit extract[28].

22. The Scotch whisky manufacturers we encountered felt that the Scottish Environment Protection Agency might be over-rigorous in its policing of European Directives in particular. The Agency strongly defended its activities both in oral evidence and in a subsequent memorandum to us. Informal discussions in Brussels with Directorate-General Environment confirmed the intention of the European Commission to ensure proper compliance with the Water Framework Directive. It was, however, suggested to us that, where appropriate, derogations might be granted. We believe there is scope here for further investigation of the equation between proper environmental control and the imposition of a bureaucracy which causes unnecessary time and cost burdens for industry.

23. An aspect of our inquiry which we regarded as of the greatest importance related to health matters. We have reservations about the likely impact on the health of the people of Scotland if excise duty rates on alcohol were ever significantly reduced. Oral evidence from health professionals did though seem to suggest that advertising merely encourages a change in brand or type of alcohol rather than acting as an enticement to use the drug[29] in the first place. Comments from the Alcohol and Health Research Centre also seemed to confirm the view of distillers that "alcohol is alcohol is alcohol"[30] in whatever form it is taken, be it wine, beer or spirits, and should be taxed accordingly.[31] The use of soft drinks raised issues of dental health and the effects, perhaps addictive, of additives such as caffeine.[32]

24. All the written and oral evidence we have received has been published in separate parts in the series HC 973-i and ii, Session 1999-2000 and HC 114-i to v in the current Session. HC 114-v is the Appendices to the Minutes of Evidence. We commend this evidence to the House and to any future select committee charged with the monitoring of Scottish affairs, which we hope might decide to produce the substantial report the subject demands.

8 Irritable, annoying. Back

9 Torment. Back

10 Vex. Back

11 Ear. Back

12 Barley. Back

13 Uisge beatha. Back

14 Ev. p39, para 1.2; See also Ev. p104. Back

15 Ev. p104. Back

16 Appendix 1, p204. Back

17 Q117. Back

18 Ev. p114, para 1. Back

19 Ibid, para 23. Back