Contingency planning for Brexit

“No deal is better than a bad deal.” Theresa May’s Brexit slogan is resonating in risk management departments across the country.

Since her Lancaster House speech in January 2017, in which the Prime Minister set out her Brexit vision for the future, British industries have not received many guarantees from government on what Brexit really means to them.

Political chaos

One, if not the biggest, stumbling block to push negotiations between the UK and the EU forward is the border issue between Northern Ireland and the Republic of Ireland.

Brexiteers want a clear cut from the customs union -not only the single market. The Prime Minister and her European counterparts want to avoid a policed border zone, as that brings back bad memories. And the Democratic Unionist Party (DUP), which makes up May’s government, will not accept any internal barriers between Northern Ireland and the British Isles.

How to reconcile these opposing viewpoints? Clearly, no-one in the UK or Europe has come up with a feasible solution -yet.

A two-year transition period has (in theory) been agreed upon, so that all sides get more time to reach an agreement. Nonetheless, British companies are being asked to prepare for a no-deal scenario by March 2019. And there are pertinent reasons to do so.

May has to watch her back from several angles. The rivalries around Brexit are not going away and the Prime Minister will have to pick her own priorities to respect “the will of the British people”.

Giving in to Brexiteers could turn Parliament against her and result in a no-deal scenario. Staying closer to the EU (in whichever form) could result in a leadership challenge, irreparable reputational damage and potential new elections. If -hypothetically speaking- May’s government falls, could a Labour government take over? And what kind of Brexit would they be seeking?

Given the political uncertainty described above, it is advisable to British firms to put contingency plans in place sooner rather than later.

Getting ready

A survey by the Confederation of British Industries (CBI) analysing the way businesses are preparing for Brexit has found that companies are diverting time and resources to Brexit that could otherwise be dedicated to growth. It also stated that Brexit can impact every part of a single business and that the lack of coherent information is a major difficulty for appropriate contingency planning.

“Most contingency issues still require political decision making in order to create right operational procedures through legal frameworks,” says Richard Rumbelow, Brexit Advisor of EEF, the Manufacturer’s Organisation (formerly known as the Engineering Employers’ Federation).

On the same page is Mike Thompson, Chief Executive of the Association of the British Pharmaceutical Industry: “Many companies require legal certainty, not just political will to plan effectively for the future. Making sure the supply of medicines is uninterrupted is essential to ensure patients in the UK and EU can get the medicines they need from day one of Brexit.”

The CBI survey also showed that the response rate from British businesses to contingency planning depends on size and economic sector. Larger UK companies tend to be further ahead in their Brexit planning than most SMEs.

“SMEs are far less likely to have begun the contingency planning process but they are being encouraged,” says Jeegar Kaddad, Chief Economist at ADS (trade organisation representing Aerospace, Defence, Security, Space).

Real estate is cited as a sector particularly aware of the issues at stake as their profits have already been hit by the depreciation of sterling post-referendum. On the other hand, transport and manufacturing companies lack behind other industries in terms of preparation.

These differences also pose problems for the wider supply chains of the economy, the survey mentioned.

Rumbelow of EEF agrees: “The changing status will have implications for the flow of trade in our very complicated supply chain movements across the border.”

Different sectors, same concerns

Although sectors might differ in exposure and preparedness to Brexit, eventually they all do share the same concerns that come with an unprecedented event of this sort and magnitude.

Market access, talent acquisition, regulation, access to capital, currency depreciation, contract continuity, tariffs, trade disruption, investment appetite,… are all part of the package that make or break an economy.

“Our concerns are not that different from any other sector of the economy,” argues Kaddad from ADS. “Securing a transition, keeping regulatory alignment and an efficient customs regime are the key factors to consider.”

Statistics from the Office of National Statistics (ONS) show that Brexit is already impacting the number of Europeans coming to the UK for short and long-term stays.

“EU nationals have begun to leave the UK because of sterling depreciation or because they do not like the Brexit climate and general uncertainty,” confirms Rumbelow of EEF.

CBI’s survey on how businesses are preparing for Brexit came to the same conclusions and noted Brexit is already negatively affecting the recruitment and retention of employees in the UK.

The issue around contracts and their legal equivalence post Brexit is another obstacle for firms across industries.

“The rights of existing contracts and how you can continue to serve those are a fundamental aspect of the negotiation talks,” says Vincent Vandendael, Chief Commercial Officer at Lloyd’s London.

These issues also have an impact on investment decisions inside multinational firms that do not get a coherent answer from the government on strategy or any reassurance of a future trade deal.

“Executives have to argue longer and harder to get money directed to the UK, rather than somewhere else. Foreign Direct Investments flows are at risk,” says Rumbelow at EEF.

He adds: “Brexit is in many regards a balance sheet issue at the moment. The costs of raw material imports balance out the increase in exports seen post referendum sterling depreciation.”

Moreover, delays at the UK-EU border could turn out to be quite expensive for most parties involved.

Kaddad at ADS already calculated the expenses for his sector. “A new customs regime will add 10 to 15 percent of administration and customs costs just to move something across the border,” he says.

Even in a scenario in which the UK can strike a deal with the EU to retain tariff-free exchanges, increased costs will still be there.

“Tariff-free environment does not mean that you do not have added customs declaration paperwork costs. It is like self-assessment tax, you know you do not have to pay tax but you still have to prove it,” adds Rumbelow.

Prepping up for a “no-deal” scenario is far from easy as the information available is limited. Across sectors, British industries stand as a united front demanding more certainty from government about transitional arrangements that could adjust radical contingency planning and retain growth models.

In practice

Since the referendum vote was announced, the whole Brexit narrative has been embraced by a massive sense of uncertainty. However, you could also argue, till what extent can you prepare for something that you do not know how is going to look like?

“You have to think of it like insurance,” says Kaddad from ADS. “Our supply chains are directed to prepare one-month worth of stock at their own cost. This applies to both UK and EU suppliers,” he clarifies.

Others have more radical solutions in mind. Vandendael at Lloyd’s London comments on the company’s decision to open a new subsidiary in Brussels: “We need to take an entire market with us and remove the uncertainty that the referendum may have created and continue to retain access to the Lloyd market.

Moreover, there are clear advantages of being in Europe, regardless of Brexit. We know through our studies there are at least another €10billion available through new lines of business in Europe, in areas such as cyber and GDPR just to name a few.”

Lloyd’s is expected to start writing business through its new subsidiary by January 2019.

“From our perspective we would love to remain passporting rights into the single market. Nothing can really replicate that access, despite us setting up a Brussels subsidiary,” adds Vandendael.

“Firms need to start understanding where their biggest exposures and liabilities lie. Map your supply chain and check-up on your contractual regimes,” advices Rumbelow.

The hope is that sectors will not be set against each other when negotiations get tough with the EU.

“A political decision will have to be made through a high degree of analysis which sectors need more protection than others. Agriculture has always been a highly political sector with a high degree of protection from the domestic (national) environment. The history of agriculture within the EU is one based of every country defending its own interests,” notes Rumbelow at EEF.

Kaddad at ADS hopes politicians will leave aside ideology and focus on reality: “It should be common sense that we have an aviation deal in which planes can still fly, regardless of Brexit.”

Many might question the common sense of the political environment at the moment but it does not harm British industries to be prepared for a cliff-edge scenario in March 2019. As the EU promised May’s government: “Nothing is agreed until everything is agreed.”