Mixed outlook for Ireland's sectors as Brexit looms
Businesses including retail, life sciences, construction and tourism face challenges
Brexit presents significant challenges for the retail sector. Photograph: Getty Image
How are the various sectors faring as Brexit looms?
“It’s very challenging from a retail perspective,”says Retail Ireland director Tom Burke. “There is a very high level of integration with the UK. And not just in terms of the brands on the high streets but from a supply chain perspective as well. Our members have been working with suppliers in the UK on the implications in terms of tariffs and potential delays at customs and so on. With a new October 30th deadline now in place, members preparing for three possible Brexit scenarios – a hard crash-out; a managed withdrawal; and the status quo remaining in place.”
PwC partner David McGee agrees. “It’s all about the supply chain. Companies are having to make sure that supplies are in place if there are long queues and delays at ports. One of the problems they are having is that a lot of the strategic planning was for March 29th. If a warehouse is full of stock that means cash is tied up in it, but they will still need to have a certain amount of stock in place. That means there will be cost increases.”
The perception has been that UK retailers operating here will be hardest hit, Burke adds. “But the whole sector now operates just in time supply chains. Two-thirds of processed foods are sourced from or through the UK, for example. Everyone will face problems as a result of these just in time systems which has been introduced over the past five to 10 years. The shops order overnight, and the goods are delivered in the morning at the moment. The sector could become a victim of its own efficiency gains.
“There is an acceptance that things will be a little bit slower,” he adds. “If you are just talking about a product sitting at a port for a while longer that’s bad enough as it is costing money. But when it comes to perishable foods it will be even worse and may require alternative sourcing. Uncertainty is the prevailing sentiment at the moment, but retail is a fast-paced environment and the sector is used to quick decision-making.”
The Department of Business, Enterprise and Innovation has issued helpful advice to manufacturers affected by Brexit. “Should the UK depart from the EU with the approval of the withdrawal agreement, it means a transition period will be in place until at least December 2020 and current trading arrangements would continue. The transition period would remove much of the immediate risk to Irish businesses from Brexit, though serious longer-term threats would remain, and much would depend on how future trade talks progressed,” it says.
The department advises businesses to use this time to determine how dependent their supply chains are on the UK. “This means that if you import goods from, export goods to, or move goods through the UK post-Brexit, new rules will apply after the transition period, depending on the agreement of the future relationship between the EU and the UK.
“What they are chiefly worried about is supply sources,” says McGee. “They have to establish where their components and sub-assemblies are coming from. Some are holding stock here but there will be supply chain and duty issues. Also, the sector is a proxy for exporting generally and companies will need to get their economic operators registration and identification (EORI) number from Revenue if they want to export to or import from the UK.”
Other practical steps to take include talking to logistics partners as they will need new information to avoid delays in moving goods to and through the UK. The department also advises manufacturers to contact their UK customers to discuss how they will continue to trade post-Brexit and to consider sourcing goods or services in Ireland or elsewhere in the EU to address concerns about continuity of your supply chain.
With its global and highly regulated nature and highly complex supply chains, the Irish life sciences sector industry will face considerable challenges as a result of Brexit, regardless of the eventual outcome of the process. Chief among these are the probability of new customs barriers between the EU and the UK and the impact of the UK’s departure from the EU regulatory system.
At a recent Brexit stakeholder event hosted by the Health Products Regulatory Authority (HPRA), more than 400 industry representatives were given a detailed briefing on the preparations being made to mitigate the impacts of Brexit and ensure continuity of supply of potentially life-saving medicines and medical devices to Irish patients.
Aoife Farrell, health products distribution manager with the HPRA, advised companies to ensure that they had detailed knowledge of their supply chains, and she posed a number of questions. “I can’t stress enough the importance of mapping out your supply chain in detail – all the way from the manufacturer to the patient. Do you know where the active substance comes from; do you know how it gets here; does it transit the UK, or does it come from a UK manufacturing or storage facility; and what new regulatory and customs requirements do you need to be familiar with?”
From a regulatory point of view, when the UK becomes a “third country” products will have to be tested and certified at the point of importation into the EU. The EU certification system for pharmaceutical products has a number of layers to it and these will have to be dealt with following Brexit.
The situation was eased somewhat for pharmaceutical exporters in January with the announcement by the UK government that EU Community Marketing Authorisations will be converted to UK Marketing Authorisations following the UK’s departure from the EU.
The position for medical devices is quite different. These products are certified by more than 50 authorised bodies across the EU. However, it is estimated that up to 40 per cent of medical device products sold in Europe are certified by UK bodies.
Niall MacAleenan, deputy director, medical devices, HPRA, explained that the European Commission announced some time ago that licences issued by UK bodies will be invalid following Brexit. This requires Irish importers to engage with their suppliers to encourage them to secure alternative certification, or to find alternative products which are certified by EU authorised bodies.
The construction sector will face a number of issues following Brexit and these mainly relate to the industry’s reliance on the UK for many of its key supplies. The Department of Business, Enterprise and Innovation has issued helpful guidance for companies which face these difficulties. The first is to check whether your current certifications, licences or authorisations will be valid post-Brexit. This includes products within the supply chain.
“If you rely on UK Notified Bodies for conformity assessment or CE Marking, you will need to arrange to either transfer existing certificates to an EU27 Notified Body or to obtain new ones altogether,” the advice continues. “If you buy or sell your materials from or to the UK, or move them through the UK, you must consider the potential impacts on your supply chain. This includes consideration of the use of the UK land bridge to transport materials. You will also need to prepare for any new customs arrangements and the impact they will have on your business such as potential delays.”
McGee notes that stockpiling isn’t really an option for construction companies facing such delays. “A lot of windows for commercial and large-scale residential developments come in from the UK, for example,” he says. “These are very much building and project specific so you can’t really buy them very far in advance. It’s a very difficult sector to stockpile in.”
With the new Article 50 extension in place, firms are advised to take the opportunity to find suitable notified bodies for product certification on the EU Commission NANDO website (ec.europa.eu/growth/tools-databases/nando/) for a list of designated EU Notified Bodies. They are also advised to continue to engage with professional bodies for further information and guidance.
In addition, construction firms should continue preparing for the changes that Brexit will bring by becoming familiar with customs procedures and so on. They should register with Revenue for a customs number if they trade with the UK in any way, consider alternative markets for exporting or importing goods, and avail of the Government’s Brexit supports which are available to businesses in the sector.
Brexit has far-reaching consequences for the financial services sector. At present, financial institutions authorised by a European competent authority under an EU single market directive can provide services across the EU and the European Economic Area on the basis of their local state licence. This is known as passporting.
Post-Brexit, access to the UK for EU-based institutions may be restricted. This will probably change over time, however, as no one wants to see the UK market being closed off. This will depend on the nature of relationship agreed upon by the UK and the EU.
Ireland has already been the beneficiary of UK firms making strategic moves to protect themselves against a loss of passporting rights post-Brexit as some of them have chosen Dublin as an alternative location for the continued provision of cross-border services within the EU.
“Most financial services companies have made arrangements that will see them through,” says Mazars Ireland managing partner Mark Kennedy. “Whatever happens politically, the institutions have made arrangements to ensure insurance and equity trading are not going to fall over.”
According to McGee, matters have moved beyond the mechanics of passporting. “For firms coming from Britain to set up here the delay in Brexit has been an advantage,” he says. “They have been able to use it to get their certification in place. The Central Bank has done a huge amount of work on that but there has been a tidal wave of stuff coming at them.”
The longer-term challenges are different in nature. “The toughest challenge comes down to people. The sector is definitely at full employment and with all the new entities in town hiring people at senior level is going to be difficult.”
There is also a knock-on effect on the banking sector. “The banks will be worried about the long-term impact on the Irish economy,” McGee notes. “They are looking at increased risk in their loan books and we may see a bit of credit tightening.”
Agri and food
According to the Department of Agriculture, Food and the Marine, in a no-deal scenario, the UK will become a third country for trading purposes. This will mean that new rules will apply to operators and businesses importing from, exporting to or moving goods through the UK.
These include a range of sanitary and phytosanitary checks for animals, animal products and foods of animal origin, plants and plant products, and some foods of non-animal origin. Furthermore, there are specific rules applying to wood packaging used in the movement of goods.
“It is important that businesses undertake the necessary preparations to be ready for compliance with these changes, as incomplete documentation, inaccurate information or late submission of documentation will lead to delays, with knock on impacts for your business”, the department advises.
The highly integrated supply chain which exists for the prepared consumer foods sector on the two islands presents its own challenges, according to Linda Stuart-Trainor, director of the Prepared Consumer Foods Council of Food Drink Ireland. “The industry has a really high exposure to Brexit,” she says.
“Sixty-six per cent of prepared consumer foods exports go to the UK. On the other side, a lot of imports come in from the UK with 80 per cent of flour for bread imported, for example. We have imports to thank for the wide range of food products on our shelves that we have become accustomed to. Obviously, we have a thriving food sector but don’t produce everything here.”
The industry has been getting ready for Brexit, however. “Preparations have been ongoing for quite some time,” Stuart-Trainor continues. “Companies have been developing a deeper understanding of their supply chains. They have been looking at cases where they might be importing supplies, processing them here and re-exporting and looking at alternative sources in the EU or locally to deal with them.”
Transport is another area. “A lot of the companies use the UK land bridge. That’s quite cost effective with a travel time of 20 hours, it’s up to 40 hours direct by sea. That has to be looked at as well. No one has head in the sand, and everyone is preparing as much as they can.”
The tourism sector has been preparing for Brexit since the moment the UK voted to leave in June 2016, according to Tourism Ireland chief executive Niall Gibbons. “As soon as the vote came in we travelled to London and met with the key players in the UK travel industry,” he says.
A Brexit task force comprising Tourism Ireland and key members of the tourism sector in Ireland was also established. “We have met seven or eight times and Minister [of State] Brendan Griffin attended a number of those meetings. We have also commissioned four waves of research by RedC to see if consumer intentions in terms of where they might travel are changing.”
Visitor numbers from Britain have held up quite well since the referendum result. “In year one we saw a 7 per cent decline but there was also a steep decline in the value of sterling that year,” Gibbons notes. “In year two it began to level off and in year three we saw a slight increase. All in all, that’s quite a good result. It’s too early to call 2019.”
The main risk for the year ahead is the continuing uncertainty, he adds. “The risk is that people will put off or delay travel decisions. The longer the uncertainty continues, the bigger the risk. We will see a 2 per cent increase in air capacity to the UK.”
Tourism Ireland is an all-island body, of course. “That’s a good thing to be right now. We have just completed our strategy for the Great Britain market for the year ahead and we will launch that soon. Fáilte Ireland has a Get Brexit Ready programme for the tourism sector in the Republic of Ireland. We have also been involved in market diversification and have been focusing on the North American market in an effort to get visitors from there to stay longer and spend more. We are also looking at China now that we have direct flights.”
Ibec’s Technology Ireland group recently published a major report on Brexit and the Irish technology sector. The report finds that Brexit could disrupt digitally-intensive sectors of the economy through a number of mechanisms including the disruption of cross-border supply links, reduced market access, and regulatory drift.
“In the case of Ireland, cross-border links with the UK may be disrupted or adversely affected by Brexit,”, the report states. “This is because Brexit could increase the costs associated with these links, reducing the competitiveness of the Irish tech sector and/or diverting activity away from Ireland to the UK.”
The report finds that the impact of Brexit on Ireland’s trade in digital goods is relatively low as potential tariffs are generally low. However, customs delays and impositions could increase costs or risk sales to the sector. “For service, the main risk is the imposition of non-tariff barriers, primarily via differences in regulatory settings impacting upon market access.”
The regulatory risk should not be understated. “Depending on the Brexit scenario, fragmentation may occur unless EU regulation is regularly transposed into UK law. This may limit market access or increase the cost of business associated with relying on UK suppliers as part of the supply chain.”
The loss of the UK as a potential strategic partner for Ireland in future EU digital regulation formation is also noted.
R&D activity could also be impacted with a large proportion of EU-funded R&D projects in this country having UK partners.
There is also the potential for the UK to offer subsidies to tech firms once it is free of EU state aid rules and this could affect Ireland’s attractiveness for foreign direct investment and the competitiveness of firms located here.
There are opportunities for Ireland as well, however. These include the potential for firms to relocate activities to Ireland to minimise the effects of non-tariff measures and regulatory compliance costs, possible diversion of investment to Ireland as digital companies look to ensure access to EU markets, and the relocation of some R&D activities to Ireland for similar reasons.
Transport and logistics
The Government’s priority has been to continue to work with EU partners to maintain air and road connectivity even in a no-deal Brexit. The aim has been to minimise disruption to the UK land bridge while recognising that direct shipping routes to continental ports could provide potential alternative routes for traders who currently rely on the land bridge.
The Government has also been engaging on potential disruption to the aviation sector, including through the National Civic Aviation Development Forum. The contingency measures currently being proposed by the EU, if agreed, will ensure that flights between the EU and UK will continue even in a no-deal Brexit. These measures are dependent on the UK applying reciprocal measures.
When the UK leaves the EU, businesses that move goods between Ireland and other EU countries by road through Britain will face new rules and processes under the customs transit procedure. This procedure will use the new computerised transit system to allow for electronic monitoring of the movement of goods and requires operators to provide a guarantee to underpin the lifetime of the movement.
For consignments of animals and animal products, a documentary check will also be required. This can be done via TRACES – the EU system for recording imports of animals and animal products into the EU.
In order to continue to use the land bridge in the most efficient way post-Brexit, businesses are encouraged to register as authorised consignors/consignees in order to avail of the simplified customs transit procedure; work through their bank or customs agent/logistics provider to have the necessary financial guarantee in place; and if moving animals or animal products, work with the Department of Agriculture, Food and the Marine to register on the TRACES system.
A no-deal Brexit could disrupt Irish hauliers’ access to and through the UK. In the event of no deal, the EU will have a temporary measure in place so that EU hauliers can continue to access the UK and vice versa. This is dependent on the UK applying reciprocal measures.
The sector itself is quite well prepared, according to McGee. “They are generally very professional operations and they have done a lot of preparation. They have their warehousing space and customs documentation issues sorted. What they are most concerned about is no space left when an unprepared customer comes knocking on the door. They have simply have no capacity to offer.”