By Ian Fraser
Published: Scottish Daily Mail
Date: 9 November 2016
The unravelling of what has become known as the “Scottish shambles” isn’t just a huge embarrassment to Nicola Sturgeon and the Scottish government.
It also potentially wipes out a £10 billion programme of investment in Scotland’s infrastructure and may also sour inter-governmental relations between Edinburgh and Beijing for the foreseeable future.
The collapse of the agreement in August also provides a vivid illustration of the pitfalls that both governments and companies can fall into when trying to have commercial relations with the People’s Republic of China, which overtook Japan to become the world’s second largest economy five years ago.
Lesley Batchelor, director general of the Institute of Export & International Trade, believes that first minister Nicola Sturgeon and her Scottish government advisors committed a “howler” by not doing enough preparation before entering into the agreement. Asked how the Scottish government could have sought to do business with a company whose parent was blacklisted over corruption fears and had a questionable track record on human rights, Batchelor said: “It’s really a question of doing your homework before you start signing things.”
“As far as the Scottish government is concerned, as a business person, I would have done a lot more due diligence on that,” added Batchelor. “They do have the benefit of support from what was UK Trade & Investment, which is now the Department for International Trade, there are people in country [China] who could have helped them on that, so I don’t really understand how this can have happened.”
“People do make mistakes, though it does seem incredible when you consider all the help and advice that a government, such as the Scottish Government, has access to. When it’s a government you do expect them to be ultra-careful… We do a lot of work with Scottish enterprise including training their staff, but this does sound like a real howler.”
Martin Gilbert, chief executive of Aberdeen Asset Management which gained an operating licence to operate in China from the Chinese government last year, said: “When it comes to China it is important to engage, be constructive but at the same time tread carefully. Its potential is beyond doubt, but you need to be discerning and think long-term.”
He added: “China is the world’s second largest economy and may well overtake the US in the years to come. The opportunities within the country and its financial muscle to invest elsewhere in the world cannot be ignored. But in our experience there are no quick wins.”
Chinese trade is vital to Scotland and increasingly Chinese inward investment is too. In a five year China plan published in 2012, the Scottish government made this clear when it said it was determined to build stronger economic ties with China. The five year plan, put together when Alex Salmond was first minister, stated: “To facilitate inward investment, we will position Scotland as the ideal European base for Chinese companies with a focus on our pro-innovation business environment.” The Scottish government said it would vaunt Scotland’s strengths in low-carbon renewable energy, innovation, air routes and investment finance. SDI has established four offices in mainland China – in Beijing Shanghai, Shenzhen – as well as one in Hong Kong.
There are already plenty of Chinese companies with significant Scottish operations, including the state owned oil company Petrochina, which entered Scotland in 2011 through a joint venture with Switzerland-based petrochemicals group INEOS. Today it has joint control of the Grangemouth oil refinery, formerly owned by BP.
It has not always worked out well for Chinese investors in Scotland though. Beijing-based Sinopec acquired a 49 per cent stake in Talisman’s UK North Sea business, but the deal soured when the oil price collapsed. According to the energy expert, Jilles van den Beukel, “For Sinopec a $1.5 billion investment turned into an abandonment-related liability within three years.”
A partnership between Chinese battery technology specialist BYD and Falkirk-based bus builder Alexander Dennis, which is 55 per cent owned by investment funds of Brian Souter, that kicked off in October 2015, looks more promising, and there have been reports that BYD may make a £200 million bid the whole of Alexander Dennis.. Together the two companies are equipping municipalities across the UK – including London and Liverpool – with zero-emission fleets of electric buses under the Enviro200EV marque. Unveiling the deal Alexander Dennis and BYD predicted their partnership could seem them make £2 billion worth of vehicles.
Chinese aviation giant HNA Group, which part-owns China’s fourth largest airline Hainan Airlines, last year expressed an interest in eyeing up an acquisition of Prestwick Airport, which the Scottish government nationalised in October 2013 but is eager to sell. HNA signed a memorandum of understanding with Prestwick airport in October 2015, allowing preliminary discussions to proceed. The Orkney-based European Marine Energy Centre and the University of Edinburgh have signed a memorandum of understanding with organisations based in the Qingdao area with a view to developing a marine energy test site in China.
It is not all a one way flow. Last year Scotland’s food and drink sector exported £85 million of goods including Scotch whisky to the People’s Republic. In a recent deal the Chinese internet giant Tencent acquired a stake in the Scottish mapping business Sensewhere, in order to use its mapping solutions in Tencent Maps. Sensewhere will also be Tencent’s preferred vendor for location-based advertising services in China. Also huge numbers of Chinese students, including undergraduates and post graduates, are studying at Scottish universities.
One of the major risks of doing business in China is that Chinese business partners will lack the same levels of corporate governance as their western suitor. After all, China is a country where pirating everything from smartphones to Hollinger t-shirts to Range Rover Evoques remains a way of life. The theft of intellectual property remains a massive risk for anyone doing business there. Edinburgh based Pelamis Wave Power, a Scottish renewable energy company, had several laptops stolen in a burglary after it was visited by a 60-strong Chinese government delegation in 2011. A few years later, it noticed the launch of a strikingly similar project in China.
And, as Sturgeon has discovered to her costs, there are obvious risks when a government seeks to win business from a regime like China’s which is renowned for having a poor record on human rights and the suppression of dissent.
Sturgeon’s predecessor, Alex Salmond found himself in an awkward position when, the Dalai Lama, who is an enemy of the people in Beijing, paid a visit to Scotland in 2012. The Dalai Lama was received at the Scottish Parliament, and opposition leaders and human rights activists urged Salmond to meet the Tibetan spiritual leader. However Salmond kowtowed to the Chinese ambassador who urged him in the strongest possible terms not to meet the Nobel peace prize winner. Fearing a meeting would threaten Chinese investment, Salmond gave the Dalai Lama a wide birth and reassuring Beijing the trip had nothing to do with his government.
Overall Scotland is lagging where winning inward investment from China is concerned. Mark Harvey, senior partner at Ernst & Young says that Scotland it is underperforming the rest of the UK. “China it is actively looking to invest internationally. However at present China is favouring other parts of the UK over Scotland. The latest stooshie over “the Scottish Shambles is unlikely to help matters.
This article was published on page 16 of the Scottish Daily Mail on Wednesday 9 November 2016, under the headline “Why the £10 billion shambles over Sturgeon’s China deal has dealt a damaging blow to Scotland’s economy”. To read the article via PressReader click here. This version may differ slightly from the as-published version.