HMRC paid consultants from McKinsey £680,000 for Brexit work

14 June 2018

An ill-fated proposal for a post-Brexit customs arrangement has cost the British government more than it bargained for, after it emerged that McKinsey & Company had collected a fee of hundreds of thousands of pounds for its drafting. The plan was quickly dismissed by the EU, with Brussels ruling out any customs management arrangement without the introduction of a hard border with Ireland.

2017 saw McKinsey clinch a £1.9 million contract for six-months of work with the Department for Exiting the European Union. The deal, which ran from April to October last year, saw the strategy consulting giant assist with the implementation of nearly 800 Brexit-related plans. The contract helped further paper the cracks at Whitehall, following the extensive streamlining of the British Civil Service in recent years, but while the future hiring of some 5,000 staff was thought to further boost the Civil Service’s operations ahead of 2019’s deadline for negotiations with Brussels, the latest news seems to indicate that that figure is not enough. 

A contract awarded in January and lasting until March saw McKinsey taken on to provide an “assessment of import initiated supply chain and commercial feasibility” of the UK continuing to manage tariffs on imports destined for the EU despite having left the bloc’s customs union, while also enforcing its own independent tariff regime. The assessment, which saw McKinsey paid £680,000 for its troubles, formed one of two customs proposals put forward by UK negotiators in Brussels, in talks aimed at avoiding a hard border between Ireland and Northern Ireland – however the EU dismissed the scheme almost as soon as it arrived in Brussels.HMRC paid consultants from McKinsey £680,000 for Brexit workWhile McKinsey has not commented on the work, a spokesperson for the Treasury – which oversees Her Majesty’s Revenue and Customs (HMRC) – was quoted as saying that the government wanted to “harness expertise from both the private and public sector” to “ensure trade with the EU is as frictionless as possible.” 

The UK Government has subsequently faced fierce criticism for its paying of private sector consultants hundreds of thousands of pounds to help formulate a plan that ultimately proved fruitless. Brexiteers in Prime Minister Theresa May’s party lambasted the “customs partnership” plan – known in Whitehall as the “hybrid model” – with leading Eurosceptic Jacob Rees-Mogg describing it as “completely cretinous” and a “betrayal of common sense.” 

Meanwhile, Brexit Secretary David Davis also shown limited enthusiasm for the proposal, having previously told an audience of American business people as far back as September that it was merely a “blue sky idea.” When asked earlier in 2018 by MPs on the House of Commons European scrutiny committee which of the UK’s two customs proposals he preferred, Davis added, “What is the point of paying consultants to do this work and to make the decision in advance?” 

In a statement, Labour’s Shadow Brexit Minister Jenny Chapman, whose party has called for a customs union with the EU, accused the government of “wasting time and money” on alternative customs models by “outsourcing the problem to a private consultancy.” Chapman said the government should publish the outcomes of McKinsey’s work so MPs could “scrutinise the feasibility” of the government’s customs plan transparently.

As the implementation of Brexit at a legislatory level continues to prove heavy work for the government, having scarcely survived a major vote on the matter in June to complete negotiations with or without a deal, without having to face further “meaningful votes”, the executive will be keen to avoid further criticism.


UK manufacturing sees orders slow amid Brexit anxiety

11 April 2019

Manufacturing in the UK saw negative growth for the end of 2018, reflecting a wider slowdown in the UK economy to 0.2% for the quarter, followed by three months at the start of 2019 which saw continued softening in orders. With uncertainty still hitting the sector ahead of Brexit’s deferred deadline, the industry faces a difficult 2019.

Despite a perpetually changing economic landscape, manufacturing remains a keystone industry in the UK. Optimism in the industry has been riding high in recent years, reflecting the perceived potential of automotive technologies, but last year saw a slight dip in business performance, ahead of what seems set to be a turbulent period for British manufacturing. Ordinarily, the sector might have expected to recover its footing relatively quickly, but with the looming spectre of Brexit making the economy’s future completely uncertain, this has not been the case.

The uncertainties of Brexit have continued to create headaches for companies on both sides of the channel. As contingency planning continues, new analysis from BDO and the Make UK explores how manufacturing – a segment likely to be hard hit by Brexit – has fared in the final quarter of 2018.

Output balance stable

Manufacturing remains a key industry in the UK, generating around 10% of total economic output and supporting around 2.7 million jobs. Yet while the industry has seen a number of years of strong optimism as well as demand, Brexit is set to throw a spanner in the works, with a range of manufacturing companies leaving the UK, or considering it. Indeed, UK manufacturing’s output currently sits at a 15-month low as the industry anticipates a cliff edge Brexit.

In terms of growth for various parts of the UK economy, a slowdown was noted in the final quarter of 2018 compared to Q4 2017. Manufacturing, in particular, saw growth declines coming in at almost -1%, with a similar trend in production. Construction saw a sharp contraction, falling 2 percentage points to below 0% growth in December 2018. Only services managed to have positive % growth in the final quarter. The final quarter as a whole saw growth of 0.2% in the UK economy – the lowest level in six years.

Output across most sectors in the industry remains positive, with the percentage balance of change in output at 22%. The result is the tension quarter of positive percentage balance of change, with stagnation on the final quarter of 2018. The firm is projecting a slight softening of output going into Q2 2019. The firm notes that there is some stockpiling taking place, with orders and outputs unaligned going into 2019.

Order balance remains positive but dips further

While there is a broadly positive picture for output, the firm does note considerable differences between subsectors. Basic metals for instance, saw a net 24% fall to -18% over the past three months. Metal production is also seeing relatively poor performance as demand from the automotive industry enters a period of acute uncertainty. However, most industries are to see improved output on balance, with rubber & plastic increasing from a net 11% to net 56%.

Export trade

Having been buoyed by the lowered value of the pound, UK export orders are up slightly on the previous quarter, but remain well below the most recent peak in Q3 2018. Domestic orders were relatively strong, with a year between the most recent peaks for the segment. However, Q2 2019 looks to see domestic orders fall sharply, to half Q1’s result, while export orders too are set to see declines.

The decline reflects a decrease in basic metals, possibly a reflection of changes affecting the auto industry. Meanwhile, export orders are down due to Brexit cross-border uncertainty – the effect of the sterling devaluation unable to continue to buoy the market. Basic metals and metal products are both in negative territory for the coming three months.

Investment and employment intentions

UK employment figures reached new milestones, with total unemployment down to 3.9% while participation rates hit record highs. Employment planning continues to be in net positive territory, with a net positive balance of 22% in Q1 2019. The coming months are projected to see a slight dip, again, largely resultant from uncertainties around Brexit. Basic metals is the sector most likely to see a negative trend, reflecting the expected decline in orders.

Investment intentions meanwhile continue to be in positive territory. However, again, the now acute uncertainty about Brexit – the UK government has boxed itself into a corner – mean that confidence around investment could wane rapidly.

Commenting on the wider economy, Peter Hemington, a Partner at BDO, said, “Manufacturing firms have been ramping up their preparations for a disorderly Brexit, in large part through the stockpiling of imported goods. This has had the effect of inflating activity levels… It’s too late to do anything about this now.  But a disorderly Brexit would be far worse than the current relatively mild slowdown, possibly disastrously so… We are concerned it looks more likely than ever that we will exit the EU without a deal.”