Deal or No Deal?

AS a Chartered Engineer with a background in the oil, gas and chemical industry for BP, I’m no stranger to managing engineering projects – similar, no doubt, to many of you reading this. As engineers, we deal with – and importantly, plan for – uncertainty every day. Given the uncertainty around the UK’s Brexit deal or no deal negotiations, should we, as engineers, apply our project planning expertise to contingencies in case of no deal? If, like me, you think we should tackle the prospect head on, then this article is for you. Read on for practical advice on how SMEs can prepare for a no deal scenario.

The story so far

Brexit has become old news as far as most of us are concerned. It has become something that someone else is dealing with, and which we assume will be “alright on the night”. Is that true? And should we treat it with more concern?

Any significant disruption to the trade in goods and services to and from the EU will impact all companies and individuals. The EU 27 is collectively the UK’s largest trading partner, representing around 44.5% of UK trade in goods and services in 2017, £274bn (US$359bn) of exports and £341bn of imports. Trade dependency to and from the UK and EU 27 is important at a regional and country level, which means that this is not an issue that you can ignore if you are not a London-based exporter of services or German automotive manufacturer. Figure 1 shows the regional trade balance in goods between the UK and EU, demonstrating the importance of EU trade across all parts of the UK.

The EU Commission issued notices to stakeholders in April 2018 explaining the impact of Brexit on all aspects of the EU’s relationship with the UK. The notices describe the UK as a “third country” without any agreements with the EU – in effect a no deal Brexit. In August the UK government followed this by telling businesses to start planning for no deal Brexit with notices to many sectors explaining what the government believes they should consider. Many commentators now believe that no deal is the most likely outcome. As an engineer, this now tells me that planning for no deal has to be the base-case scenario.

Why is it important?

On a personal level we don’t know if seemingly simple things we all take for granted in the UK will still apply in the EU – for example driving licences; travel and healthcare; and mobile phone contracts.

If you are an employer there are some basic concerns you may wish to consider:

• Driving licences – Will your drivers be able to drive in the EU with an existing UK licence and if not, will the system be able to cope with a surge in demand for international licences?
• Travel and healthcare – Will you need new general and health insurance cover for staff who travel on your behalf?
• Human resources – Will you have enough staff with the right skills to run and grow your business if EU nationals don’t come to the UK or the ones who are already here decide not to stay?

If you manage risk in your business how will we collectively manage our exposure to a sudden change in our relationship with Europe for critical supplies?

• Energy – Will we run out of peak load gas and electricity post Brexit if the UK drops out of the regulated markets of Europe?
• Fuel supply – Will we have sufficient supply of transportation fuels? Will the change to IEA defined compulsory stock obligations for UK refiners and marketers be sufficient to maintain the supply of refined products in the UK if there is an interruption to the market?
• Northern Ireland – Will electricity still flow over the border from Ireland to keep the lights on in the North?
• Raw materials and intermediates – Do we have sufficient storage capacity in the UK to build critical stocks and will we have the capacity in customs and ports to be able to cope with the increased complexity and its impact on supply chains?
• Equipment and spares – Where are our strategic spares and will we be able to access them quickly?
• Currency and cash – Have we anticipated any changes in exchange rates that may occur and will we have enough cash to pay for any increase in stock or delays in our supply chain?
• Contracts – What happens to our contracts and are there any clauses that will be impacted by Brexit – is it an act of force majeure?

These risks and issues exist today, but there has been very little public discussion and no visible contingency planning. The assumption is that major companies will take the same approach they did for Year 2000 (Y2K) and that they will be planning for the impact of no deal. This may be the case, however, it is also clear from public statements by companies such as BASF that they are increasingly concerned about the integrity of their UK supply chain, which has a significant exposure to small-to-medium-size (SME) enterprises.

The inertia is driven by the mantra of both sides that “nothing is agreed until everything is agreed”, in what has become a typical negotiating arm wrestle. This creates a planning vacuum, but at least now we have been given a very clear steer from the UK government that no deal is a real possibility. This means that all the regulatory approvals and benefits of UK membership would cease at 23:00 GMT on 29 March 2019.

Positive adaptors, step forward!

If you are under the age of 50 you are unlikely to have done business with the EU outside of the framework of the single market, which was formed in 1993 and removed at a stroke many of the direct and indirect barriers to trade which are about to re-emerge post Brexit. This will mean that everything from product licensing to taxes will change and there will be a massive increase in complexity for all. We are in the middle of a complex negotiation with an uncertain outcome. “What can be done to manage the potential impact on our businesses?” is now the business-critical question for everyone.

Chemical engineers spend their lives solving problems and planning for uncertainty, so whilst Brexit is not an engineering problem, in my experience the processes we already use can be adapted to help manage the situation. The chemical and process industries will be particularly affected by any changes in the way trade takes place with the EU and the impact of any changes in regulation. The impact will be felt across the business with supply chains, procurement, finance and many other areas all needing to react to the inevitable change, so we should open our toolkit and start to plan on behalf of
our companies.

Plan for uncertainty: a three-step approach

1. SET UP A BREXIT LEADERSHIP TEAM

Create a Brexit response leader to lead your approach to Brexit across your organisation, and delegate the accountability and responsibility for developing and executing your response plans to them.

Assemble representatives from each team across those functions, sectors, teams or departments which need to belong to the Brexit taskforce reporting to the Brexit response leader.

2. REVIEW STAKEHOLDERS AND CONSIDER THE SCENARIOS

Review the impact of Brexit on your business:
a. Draw a simple map of the key stakeholders in your business from suppliers to customers for both products and services.
b. Review any touchpoints where your stakeholders meet the EU 27 or any of its trading partners.
c. Check the regulatory framework that you currently operate under, such as REACH and the Classification Labelling and Packaging Regulation (CLP).
- Review the Notice to Stakeholders issued by the EU (available from the European Commission).
- Review the advice from the UK government concerning sector planning for Brexit.
- Review available resources and sources of information from government, EU and the internet.
d. Develop a simple set of Brexit scenarios to plan for. Figure 2 shows some high-level scenarios that you may wish to consider as a starting point:
- No deal.
– Free trade agreement, similar to Canada’s.
– European Economic Area Plus agreement, based upon the deal with Norway.
e. List the critical issues by area of operation that you will need to deal with, for example:
- Customs and tariffs.
- Finance including tax, cash and working capital.
- Legal and regulatory.
- Services and employment.
- Manufacturing and supply chain.

3. DEVELOP LAYERED PLANS FOR THE BREXIT STEPS

Brexit resembles merger or demerger planning from a business perspective and there are some best practices which we can all learn from. A layered approach to planning using scenario planning will help to identify the activities and resources required (see Figure 3).

There are three periods which we should all consider planning for:

Pre-Brexit plan – The sooner that you commence planning for Brexit the better-off you will be. Any pre-Brexit plan should aim to cover at least 90 days before 29 March 2019. It will be important not to plan in isolation and to discuss your planning activity with your suppliers and customers, as well as all the other stakeholders. Don’t forget to involve employees and their representatives as you will need their help and the uncertainty created by Brexit will have an impact on everyone.

Brexit-day plan – The day on which Brexit takes place could be the point of maximum change, especially under the no deal scenario. If there is a deal agreed between the parties, the impact on the day will be more limited, but there is unlikely to be zero impact. The plan should include your approach to critical issues, Brexit-day essentials and a resource plan for rapid response to unexpected events. This type of planning is normal for chemical engineers with parallels in projects, supply chain and turnaround planning, as well as using analytical and probabilistic tools to manage uncertainty.

Post-Brexit and transition plan - Post Brexit-day there will be a period of change as the UK evolves its relationship with the EU and the rest of the world. There may be a formal transition period and/or a period when the UK unilaterally follows the existing arrangements with the EU with or without mutual recognition of conformity to the EU regulations. It is easy to identify the downside potential of Brexit, but it will also be important to consider that change will bring new opportunities and we should plan how to access them.

Industry concerns

As part of my work with the Ready for Brexit initiative, I have been meeting with a large number of companies, big and small, to hear what their issues are. There are probably three key areas I’m hearing about:

• The lack of guidance from government. The root cause of the problem is that the new Brexit department had to be created virtually overnight after the June 2016 referendum, and many of the staff have no personal experience of the enormously complex issues involved.
• SMEs have tended to assume that everything will be “alright on the night”. They have switched off from the political dogfight and are only now realising that the prospect of a hard Brexit with no deal on trade or transition period is a real possibility.
• Many people mistakenly compare Brexit to Y2K, not realising that a massive amount of work went into solving the Y2K issue by the major companies over many years before 31 December 1999. The idea of planes falling out of the sky made for good media headlines, but was never going to happen. So people massively underestimate the challenges ahead.

A major chemical company tells us that it has identified that Brexit may cost it around €50m +/- €10m in extra costs alone each year and that the uncertainty surrounding Brexit makes that very difficult to plan for. Large companies have already been planning for Brexit and have assembled teams to deal with it, but surveys show that only one in seven SMEs in their supply chain have started planning. The SMEs may not have the skills and resources to be able to ask the right questions and to develop the plans required. We hear the same issues and comments from businesses of all shapes and sizes in our discussions:

• Until the government tells us what the deal is there is no point in doing anything.
• It will all sort itself out in the end and we will muddle through somehow.
• My business is not affected by Brexit so why should I worry?

As a chemical engineer I find this quite worrying because we deal with uncertainty almost every day. Doing nothing is certainly a strategy but it very rarely leads to the best outcome. It has now become apparent to many companies that the deal or no deal situation will only be resolved late in the day and that they need to put in place contingency plans.

The companies which are already positive adaptors are putting in place additional resources and taking key decisions on what to do now, for example:

• Developing scenario plans and identifying key pre-Brexit actions:
  - Appointing agents in the EU.
  - Registering and testing products with EU bodies.
  - Opening legal entities in the EU for future
  trading purposes.
• Developing supply chain options to increase stocks of key raw materials or products close to where they will be needed.
• Avoiding major movement of raw materials or product via potential bottleneck ports over the period covering Brexit day 1.
• Training staff in the new paperwork, processes, and procedures which will apply to the UK as a third country distinct from the EU.
• Commenced export sales activity focussed on growing markets outside of the EU.

Brexit is an unprecedented event for all and we need to take lessons from other events to ensure that critical supplies of raw materials, energy, equipment and services are assured.

There’s no getting round it: SMEs will need to deal with the impact of Brexit. Front-end planning and design is critical in order to be successful and in many ways, Brexit represents a hugely challenging project for us all

The high-level advice from the EU and governments is useful, but it does not provide businesses with the detail they need to start planning. In a recent supplier conference, the conclusion was that SMEs will need external help and that major companies will need assurance. One major chemicals company is prompting its supply chain into action by signing up to a multi-user licence on the Ready For Brexit website, which allows its suppliers to access current information on Brexit and tools to identify key questions for business managers, functional and process leaders. This includes three comprehensive “Brexlists” planning tools containing over 100 important questions for businesses to address across all major functions and operations.

It's happening for real

There’s no getting round it: SMEs will need to deal with the impact of Brexit. Front-end planning and design is critical in order to be successful and in many ways, Brexit represents a hugely challenging project for us all. The UK government and EU Commission are planning for no deal - it really is time for us to admit that Brexit is happening for real, and even with all of the uncertainty, we need to act now.