Scottish Referendum Creates Strategy Scenario Drivers

    rbodapati

    On September 18,  Scottish residents vote on independence.  A few months ago, this referendum evoked similar jokes and general nonchalance as votes in Quebec, Barcelona and even Venice have in the past few years.  But new polling data indicates that for the first time a majority of voters favor “yes.”   Regardless of which side of the referendum you support, this is a major scenario driver for several sectors and many of our clients.  A few examples:

    Energy scenario driver: Value of proven and potential energy

    A lot of Scottish enthusiasm is built on the potential value of North Sea oil reserves and the ability of fracking to produce new sources of natural gas.  However, there will be significant legal battles over the property rights of existing reserves and leases.  It will take years to generate income from new exploration and production and even longer to settle all of the legal disputes.  The costs of “New Scotland” will begin accruing on day one and create significant cash flow challenges.

    Public Sector Finance scenario driver: Corporate taxes and public sector spending

    Independent of their former partners to the south, will the Scots have to apply to the EU and consequently join the Euro?  To date, the current UK government has indicated that an independent Scotland would not be permitted to remain in the British Pound.  As an EU member state, Scotland would have to meet debt requirements which could trigger tax increases (either corporate, individual or both) given the transfer payments they have received over the years. (Scotland does receive more in UK public spending than it generates in tax revenues; however, the amount is highly dependent upon how revenues associated with North Sea oil are allocated.)  Already, the British Pound is trading near its lowest level in 9 months linked to referendum uncertainty.  A “yes” vote could bring even greater uncertainty for the Pound and the Euro.

    Defense scenario driver: Structure and control of military assets

    The UK’s Vanguard class nuclear submarines are based in Scotland.  Assuming these vital military assets are retained by England, there is no logic port with required infrastructure to base them.  It is not clear how an independent Scotland would approach defense strategy or a potential agreement of forces.  Decisions on military structure (will Scotland’s regiments remain in a unified command?) and military deployment (will new bases and infrastructure be required?) will drive investment which will have implications for defense sector suppliers as well as employment in those businesses and in the military itself.

    Healthcare scenario driver: NHS strategy and structure

    Decoupled from the NHS, will there be changes to the health care strategy?  Will new health care providers be required that are “Scottish?”  Will the current, slow trend toward privatization continue?  Or, increase?  Or, decrease?

    The referendum in 10 days provides an excellent real time case for scenario planning. Current polls indicate the outcome is far from certain (isn’t that always the case?) which indicates it is the right time for scenario planning and appropriate risk management.

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