One third of SMEs believe Brexit will have a positive business impact

25 July 2018 Consultancy.uk

While Brexit remains an unknown quantity, as the March 2019 deadline for negotiations between the UK and Brussels fast approaches, small and mid-sized enterprises (SMEs) in the UK remain broadly positive, despite potential headwinds. While two thirds of SMEs believe Brexit has not affected them positively or negatively yet, a third believe that Brexit will benefit their business in the future.

While the UK Government’s negotiation strategy continues to come under fire, an analysis of over 1,000 SMEs has suggested that small and mid-sized enterprises are still optimistic with regards to Brexit. The quantitative research of OCO Consulting’s Global SME Brexit study, which was undertaken by Opinium between 25th May and 4th June 2018 discovered that 33% believed at the time that Brexit will have a positive impact on their business. The survey also shows that close to a third of SMEs have already felt a positive impact, with 32% reporting improvements in business since the EU referendum.

On the other hand, some 27% of SMEs believe that Brexit will be negative for their business. This is close to the 24% of businesses which say it has had a negative impact on their business, though only 6% said that Brexit’s cons have been ‘very negative’. Positivity also varies significantly based on size of company, with 46% of the smallest SMEs showing positive sentiment, as Brexit may disrupt larger competitors, offering smaller more agile firms opportunities to gain market share, something which sees positivity drop to 30% among the largest companies. Optimism is at its highest in London, with half of all companies polled being positive about the future, which is more than double that of many other UK regions – potentially because, as a top financial hub of the world, London will be best cushioned from Brexit’s impact, as major market forces will still need to access it, regardless of costs.

How has the UK’s decision to leave the European Union affected your business so far?

The broader positivity among SMEs is grounded in a noted up-turn in business since the Brexit vote, as 37% of SMEs attracting new customers and contracts since the Brexit vote, while 36% have managed to increase sales with existing customers. The respondents taken from a representative sample across UK regions, including Northern Ireland, include a majority which are currently exporting or already hosting overseas operations. These groups were also found to be the most bullish regarding Brexit. The deflated pound, which saw its value fall drastically following the infamous 2016 Brexit referendum, has made for competitive prices which have attracted overseas investment, and subsequently led to an export boom, which recently saw the manufacturing sector in particular post its strongest year since 2014, and extend its longest period of expansion in three decades.

As a result, it is unsurprising that within the group of firms which export, 43% have felt a positive impact. The same number expect this to continue post-Brexit – though this optimism is undoubtedly cautious, as according to a recent study from Oliver Wyman, the annual ‘red tape’ costs of Brexit for UK exporters will be around £27 billion even after initial steps to mitigate costs have been taken – before export tariffs potentially come into play in the event of a No Deal scenario. This would be equivalent to 1.5% of GVA, and would likely see prices rise dramatically in order for businesses to ensure their profit margins are not impacted post-Brexit. Regardless of this, exporting SMEs remain optimistic, in contrast with the minority of businesses not currently operating internationally, which see little more than one-in-ten (11%) having felt a positive impact so far, though 15% expect such an impact when looking at the future.

Moving on

Looking ahead, despite the potential of large tariffs on the horizon, of those businesses that already export, just under two-fifths (39%), expect their exports to increase following Brexit, showing that while the UK is set to leave the EU, continued access to the single market will continue to be the backbone to the ambitions of many UK SMEs. Indeed, there has been limited change in the way SMEs consider their future with the EU as an export market, compared to other regions around the world. Over the past five years, 44% of UK SMEs considered expanding into Europe, dwarfing the other regions available, including the US, which was on a distant 19%. While the figure for Europe has fallen by 9% with consideration to the next five years, SMEs in Britain still favour expansion into the closest market over any other.

% of UK SMEs which considered expanding into [region]

The most major change of all in sentiment is that small and mid-sized businesses in the UK seem to have become more focused on their domestic market. Every regional market, even those not impacted by Brexit negotiations, have all seen minor declines in SME sentiment, regarding whether or not they will expand to them. This growing insularity is likely driven by a determination among British SMEs to weather the storm in an uncertain global market by consolidating at home, and then adopting a less insular approach when the dust settles.

Commenting on the findings, Gareth Hagan, Director at OCO Global said, “The UK Government is clearly planning to secure deals around the world and for ‘UK Plc’ to export to new international markets. However, Europe is, and will continue to be the most significant market for SMEs by a long way, and so a deal with the EU, that is good for both exporters and importers and goods and services is of the utmost importance.”

“The challenge of encouraging SMEs to seek opportunities further afield is one that also persists, and ultimately needs to be overcome. Our data shows that historically, consideration of markets outside the EU remains very low in comparison and is likely to decline further post Brexit. We observe something of a ‘fear factor’ amongst both existing and aspiring exporters in many international markets.  Alongside the oft-stated intent to strike free trade agreements, and transform trading volumes outside EU, the Government and industry have an important role to play in developing appropriate channels and support mechanisms that encourage SMEs to consider markets that they may have ignored in the past.”

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Brexit will have major impact on UK-EU electricity flows

22 April 2019 Consultancy.uk

Brexit could have a major impact on the consumer price of electricity in the UK, according to an analysis by Sia Partners. The total costs for UK society could swell to €600 million annually due to less efficient flows of electricity.

As the Brexit process has perpetually stalled, with no realistic end in sight now until Halloween, underprepared businesses have been handed a lifeline. The scramble to prepare for a No Deal scenario can now continue for another half-a-year, and one of the key factors which companies will need to consider when drawing up these plans is the cost of accessing utilities post-Brexit. In the digital age, virtually no business can survive without a ready supply of electricity – while the pay-cheques of staff will also need to inflate to accommodate future rises in bills.

With significant cross-border flows of electricity between continental Europe and the UK, Brexit is destined to have a major impact on individuals and companies in this manner, according to new analysis by consulting firm Sia Partners. These flows of electricity are governed by common European rules, but when the UK leaves EU, Britain’s electricity markets will no longer be integrated into Europe’s ‘Internal Energy Market’.

European model

Historically, electricity grids and markets were developed on a national level. However, years ago the EU set out to achieve integration in electricity grids, on the premise that coupling grids and markets can lead to significant benefits. By making electricity flows possible, price arbitrage can be faded out by allowing buyers to access cheaper prices offered beyond the country’s own borders, driving up competition and lowering average prices.

Brexit will have major impact on UK-EU electricity flows

An analysis of electricity flows between the UK and Ireland demonstrates this. Before Ireland was coupled to the UK, commercial electricity exchanges on the UK - Ireland border flowed 40% of the time against the natural direction, i.e. from the higher to the lower price market. After more effective cooperation and regulation was put into place ('After the I-SEM' went live), the picture changed drastically, with commercial flows now following the price differential 96% of the time. Quantifying this welfare benefit is not easy: according to one estimate by ACER, the economic added value of having market coupling with implicit capacity allocation on the GB-Ireland border (1GW) amounts to around €110 million annually.

Europe’s aim is to achieve interconnection of at least 10% of their installed electricity production capacity by 2020. As it stands, seventeen countries are on track to reach that target by 2020, or have already reached it.

On the UK side, the region currently has a total capacity of around 5GW connected with mainland Europe (France, the Netherlands, Ireland, Belgium), corresponding to roughly 5% of UK’s installed capacity. In comparison with other EU countries, this ratio is on the low end; however, the UK is playing catch-up and has 10 interconnections scheduled for commissioning in the next four years.

Brexit

It's clear that the UK’s withdrawal from the EU will have an impact on electricity markets co-operation. The question which remains is how large will the impact will be? To provide a forecast for this, analysts at Sia Partners ran a modelling exercise with two scenarios in mind. After leaving the European bloc, the UK will have to make agreements with European countries, similar to how Switzerland and Norway currently operate. Norway has a deal with a relatively high level of integration with the EU’s internal energy market, while Switzerland stands at the other end of the spectrum, with the country excluded from several market coupling initiatives (e.g. MRC, XBID) and from implicit capacity allocation with any other EU member state.

“If Brexit leads to a construction which is similar to the Swiss deal, where UK’s electricity borders are uncoupled from its neighbouring countries, then there will be a major loss of welfare.”
– Sia Partners

If the UK follows in the footsteps of Norway, then the consequences of Brexit could be muted. According to Sia Partners’ calculations, the economic loss would be minimised in the mid-term, with only operational challenges expected. For example, the implementation of pan-European projects, such as XBID, could run into delays in the UK. The EU currently has 7 of such interconnection projects scheduled for completion before 2022.

“In case a Norwegian style deal is struck, the UK will lose its decision power related to EU energy policy but it would allow keeping the benefits linked to the internal energy market not only for itself but also for Ireland and continental Europe,” the researchers state.

If, however, a Swiss deal is struck, then the projected costs could range between €500 million to €1 billion. An expected 60% of this loss will be borne by the UK, 16% by France, and 8% by Belgium, the isle of Ireland and the Netherlands. The researchers concluded that if Brexit leads to a construction which is similar to the Swiss deal, where UK’s electricity borders are uncoupled from its neighbouring countries, “then there will be a major loss of welfare.”