Economy, Energy and Fair Work Committee

Meeting date: Tuesday, August 25, 2020

Official Report 656KB pdf

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Tied Pubs (Scotland) Bill: Stage 1

I am pleased to welcome our panel of witnesses to discuss the Tied Pubs (Scotland) Bill. With us are Jamie Hepburn, the Minister for Business, Fair Work and Skills; Aileen Bearhop, the head of industry development in the food and drink division at the Scottish Government; and Dr George Burgess, the deputy director for food and drink at the Scottish Government.

I invite the minister to make a short opening statement.

Thank you for inviting me to join you. I hope that, unlike last week, our internet connection remains secure, so that we can successfully begin and conclude our conversation.

The Scottish Government supports Mr Bibby’s broad intention of fair and equitable treatment within commercial agreements. We are keen to have a successful hospitality sector in Scotland, and tenant pubs are an important part of that.

The Scottish Government’s position on Mr Bibby’s bill at this juncture is a neutral one: we have not determined what our position on the bill at stage 1 will be. We will carefully consider the committee’s report, which will be based on the evidence that you gather, before we determine what our position will be.

Having said that, we would be interested to see some more evidence behind the detail of the bill. Tenure in the Scottish pub sector is quite different from that in England and Wales. More than 60 per cent of pubs in Scotland are independently owned and managed, and the proportion of pubs under tied arrangements in the rented sector is much lower. The policy memorandum confirms that the number of arbitration cases and market-rent-only requests as a result of the bill is likely to be very low.

As we say in the written submission that we provided to the committee in July, we think that more evidence may be required on the nature and scale of the perceived problem. It is also important to better understand the consequences of a bill that goes further than the legislation in England and Wales in a number of respects. The Government has been provided with only a little evidence of any significant challenges, and I have had little contact from stakeholders on the matter, except in relation to the bill itself.

I very much look forward to seeing the committee’s report and giving it the Government’s full consideration. We will then debate the bill at stage 1.

The Scottish Government’s written submission suggests that the voluntary code might offer tenants enough protection and that the bill might not be needed. We have heard from various tenants during our work, and they did not seem to be particularly aware of that code. How can we address that and ensure that everybody knows what the code provides?

Before I was cut off last week, I saw the evidence that was provided. Paul Waterson commented that his organisation was purportedly meant to be involved in it, but it was not aware of that. There is clearly an issue there.

We have not been provided with any particular evidence to suggest that there is a lack of awareness of the code. I observe that it is primarily an issue for the industry to determine, but we would stand ready and willing to offer any assistance that we could provide in that regard.

This goes back to the fundamental issue. You will doubtless ask some questions about the research that we undertook back in 2016, which identified that there was not a particular issue that needed to be grappled with. This is only speculative on my part, but I wonder whether that is also reflected in people not needing to acquaint themselves with the terms of the code. However, if evidence is presented that we require to do some work to assist the industry in making the code better known among those who operate in the sector, we will, of course, be happy to consider that.

There were also a few comments about people being unwilling to come forward to raise issues that are coming up in the sector. Have you picked up on that aspect?

I have been told that that is an issue. Again, however, I have not been presented with any evidence to suggest that that might be the case. I go back to the evidence that you heard last week. You will need to forgive me, as I cannot remember who made this point, but a witness who was pressed on the question said that the evidence on that is anecdotal. In that sense, it is hard to quantify.

As a Government, we are capable and we operate on the basis of respecting the confidentiality of people who come forward to express any concern. I know that the committee takes the same approach and that, when any parliamentarian is representing individual constituents, we do that on the basis of respecting the confidentiality of those who bring forward concerns. I am not, however, being inundated with correspondence from concerned parliamentarians who are expressing the concern of their constituents. It is hard to quantify, but I am not aware of any particular evidence to suggest that people are fearful of coming forward.

11:30  

From the research that we undertook, I can say that there was a challenge in getting people to engage with the process. I heard somewhere that the committee had a similar experience—it was perhaps Gordon MacDonald who made that point when asking a question, but forgive me if I have recalled that incorrectly. I do not know whether that reflects people being afraid to come forward or whether, as seems to be borne out by the research that we carried out, there is not a substantial problem here and that is why people are not coming forward.

It might be worth while for the committee to look back at the research that we published at the end of 2016. In their report, the researchers identified some of the difficulties that they encountered in their work. They really struggled to get companies, pubs and tenants to engage with the research, and they cited a number of possible reasons for that. One of those, which the minister mentioned, was unwillingness to provide sensitive personal, business and financial information. There might be some mistrust of the Government. Another reason that was cited was a general lack of interest and a failure to see or understand the need for legislation. A number of factors limited the research that was able to be undertaken in 2016.

Minister, you mentioned research. I am led to believe that the Scottish Government commissioned a study on the pub sector in Scotland last December, which was phase 1. Has any further research been undertaken since then?

The only substantial research that we have undertaken is that which was published in December 2016. I will bring in George Burgess or Aileen Bearhop to supplement my answer, in case they are aware of anything else, but that is the only research of which I am aware. We have drawn many of our assumptions about where we are from that research, although I make the point, as George Burgess has just done, that there were challenges in getting engagement during that research.

We have not undertaken any further formal research since then. We have continued to engage with representatives of the industry, who have different perspectives on the necessity for the bill as a legislative vehicle, as the committee heard last week. Even there, however, engagement has been fairly limited. I am not getting lots of publicans or even their representative organisations knocking at my door regularly. The engagement has been largely through the prism of the bill.

The only significant research has been the research that we published at the end of 2016. I do not know whether George or Aileen knows of anything else.

There has been nothing since then.

One of the recommendations from that study was that more dialogue should take place between trade bodies, the Government and interested parties about the development of a bill on the subject. Have you been able to do that satisfactorily, or would you wish to carry on with that should the bill progress?

It is both. We are in regular contact with the representative organisations of the industry on these matters. In the fairly recent period, I have had dialogue with the Scottish Licensed Trade Association, the Scottish Beer & Pub Association and Greg Mulholland, the name of whose organisation does not quite come immediately to mind—it is the British Pub Confederation. We discussed some of these matters, although of course we also discussed a wide range of other matters including the current Covid-19 context and a variety of other issues that impact on the industry.

We have had on-going dialogue, and we will of course continue it. That includes me and Fergus Ewing, as the cabinet secretary with primary responsibility for food and drink policy for the Government. That dialogue happens, and it will happen on an on-going basis.

The Scottish Government’s submission talks about “potential unknown consequences” of the bill. Have you explored those and come to a conclusion on them? How does the economic impact of those consequences compare with the £31 million that is currently extracted from the Scottish economy by tied pubs?

I will be candid: we are not advancing the bill, and ultimately it is for Mr Bibby, who is advancing the proposition, to set out the wider evidence base. However, there are issues with the bill going a bit further than the UK Government legislation on the issue has done. For example, the bill could encompass a wider range of pubs. A threshold is set in the English and Welsh legislation that the company has to own 500 or more pubs under the arrangement before the mechanism is triggered. I appreciate that it may not be sensible to have a threshold of 500 pubs in Scotland, where we have a very different profile, but why is there no threshold at all? What are the consequences of that? What might be the consequences for investment?

It has certainly been put to me by representatives of the industry—I heard some evidence on this being provided to the committee last week, while my connection remained and enabled me to hear it—that investment might not happen if the bill is advanced. Another issue is the proposed arbitration, which could be applied retrospectively after a person’s lease has concluded. What is the efficacy of that move, and what would be the outcome thereof if the person was no longer a tenant?

Another issue that we need to understand relates to what is clearly a sound principle that has been laid out in Mr Bibby’s bill that any commercial agreement

“should fairly share the risks and rewards amongst the parties.”

I do not think that anyone would demur from that, but we are talking about legislation and, if we are creating that as a point of law, what does it mean in practical terms?

If you are asking me whether we have undertaken any substantial analysis of that, the answer is that we have not, not least because, as you can imagine, other things have been prevailing on us and occupying us in the past months. Those questions should be put to the person who is proposing the bill. That is not me and it is not the Scottish Government.

Dr Burgess, do you want to comment?

My request to speak was in relation to the previous question. My finger was a little slow on the button.

In my question, I talked about the £31 million loss to the Scottish economy because of tied pubs. Surely no other consequence could be as crucial as the current loss of that investment in our pub sector. Has the Scottish Government looked at that? If so, what plans does it have to try to take that £31 million back and keep it in the Scottish economy?

I think that we would need to understand the evidence base better to suggest that that is actually the case. We need to consider the flipside as well. Last week, I heard some people say, in respect of the beer companies saying that they are holding off on investment propositions, “Well, they would say that.” I can only take that at face value. I do not know whether these things can be drilled into further, but that has also been posited. These things need to be balanced.

We have not undertaken any research thus far, although I would not narrow down the option of our doing that. If the committee feels that it would be helpful, we will of course consider it.

What does the minister think about the contribution from Heineken, which is the pub company that is responsible for the largest number of tied pubs in Scotland? The company’s headquarters here in Edinburgh supports hundreds of jobs. How can the idea of an extraction from the Scottish economy be squared with the undoubted contribution made by those jobs to the Edinburgh and Scottish economies?

We need to consider that in the round. Those jobs make a substantial contribution. That said, I have seen no suggestion that those jobs or that headquarters would be in peril as a consequence of the bill. We should be fair and reasonable and make that point.

Nonetheless, some of those companies have suggested that, as a consequence of the bill, some investment propositions are being held off at the moment and might not happen. That could be followed up with those companies, but they have put that on the record.

Last week, the Scottish Beer & Pub Association told the committee that, at the moment, more investment is coming into Scotland because we do not have the legislation and there is legislation in England. I take that point at face value, but it may need to be further drilled into.

I have a question about guest beers, on which we heard polarised evidence from last week’s panels. The pub companies suggested that local guest beers could be offered. What evidence does the Scottish Government have to suggest that tied pubs mean a lack of choice and a lack of support being offered for local beers?

11:45  

That is a reasonable question. I have no evidence to suggest that tied arrangements significantly inhibit guest beers, nor any evidence to the contrary. By its very nature, a tied agreement means that there is the issue of getting a supply from a certain brewery. You could also posit that that means security of supply, although I guess that the counter argument to that is that it comes at a certain cost.

I heard with interest the point made by the Society of Independent Brewers that there is some distribution through the Beerflex scheme although, admittedly, it is limited. However, there is also evidence that, outwith that scheme, there are wider supplies of guest beers.

We want to ensure that the burgeoning brewery sector in Scotland is supported. Last year, I was on Harris opening a new brewery. I was delighted to be able to do that and to sample a modest amount of its new product. We want to support that sector, and if there is more that we can do in that regard we will be happy to do it. We do that through our food and drink policy, on which Fergus Ewing leads.

Right now, the bigger challenge for Scotland’s breweries is a proposition to reduce small breweries relief. The Society of Independent Brewers has a particular concern about that, and it is wider than the concern about some of the issues that were discussed last week. Therefore, we are actively exploring that with the society and stand ready and willing to give support in that regard.

You have spoken about the potential impact on investment, and other members have touched on that issue. Personally, I was surprised by the income amounts that have been indicated for 50 or 60 per cent of tenants in tied leases. They get very low salaries; some receive under £10,000, and many receive between £10,000 and £15,000 per year, which is quite a low income.

If the bill goes through, there is concern about how it might impact on investment because, at that level of income—even with the possibility of renegotiating rent and so on—it will be difficult to generate a business case that will allow tenants to invest in the business. What is the Scottish Government’s understanding of the sources of investment in the pub sector in Scotland, and how does it compare to the situation in the rest of the UK?

There are a multitude of issues in there. I will try to take them all on, but if I omit anything, please come back to me.

The first issue was about incomes for those who operate on a tied lease. If anyone is earning that amount, it is unacceptably low and we would have significant concern about it. I saw Edith Monfries, who was a witness at last week’s committee meeting, and she said that her company guarantees a level of income so that no one earns below that. She can only speak for herself, but that is welcome and it is what I would expect all landlords to do. It is in their inherent self-interest to ensure that their tenants can earn a decent living, because otherwise why would they want to remain as such?

Nonetheless, the point has been made. If evidence can be provided that tenants receive that amount, we would certainly want to hear about it and explore it further. I have no evidence to suggest that it has happened, other than what has been told to me anecdotally.

That brings me back to the research that was undertaken and published in December 2016, which showed that the three cohorts across the different tenures—owned, managed and pubs that operate on a tied or different type of lease—made similar levels of profit. That was in the round; it did not relate specifically to beer. Of course, much of the proposed bill relates to the relationship between the tenant and the brewer in relation to the products that are supplied directly by the brewery. However, in the round, across the entirety of the business, the analysis showed that broadly similar levels of profit were made. I hope that that is instructive, but I caveat that with the recognition that the analysis came on the back of research based on limited engagement. As the committee is aware, we have not had huge engagement on such matters with those who operate in the sector.

I do not have any evidence to suggest the scale of investment in Scotland or in other parts of the UK. The industry would need to provide that evidence. Do not quote me directly on this—I will need to refer to the evidence that was provided to the committee last week—but I think that Star Pubs & Bars said that it invested something like £5 million last year. That is just one operator, but it is a good starting place to understand the scale of investment that there has been.

One of the significant things that we have noted throughout the evidence that we have been taking is the desire from different parties to compare the situation in Scotland with the situation in England. Sometimes, we have not been comparing apples with apples, but the changes to the legislation down in England certainly seem to have had an impact. You have already said that you have not gone deeply into that issue, but has the Scottish Government drawn any conclusions from what is happening south of the border?

We have not drawn conclusions from what has happened in England. On the basis of our experience and research, we have concluded that, on balance, there is not a significant problem in Scotland. That might reflect the different nature of tenure, which I mentioned at the outset. In England, about 39 per cent of pubs operate on a tied basis, whereas the figure in Scotland is 17 per cent. Even within that, there are differences. In England, it is far more common for people’s domestic property to be attached to the pub that they rent on a tied basis. Examples of that in Scotland are negligible; we do not see that in the market in Scotland. The forms of tenure in Scotland and south of the border are very different.

We have not drawn conclusions from the English experience. I contend that it is still fairly early days following the changes in England. I have heard concerns about the manner in which the adjudicator that has been established in England has been operating. I will not comment on that, because I have not engaged with the office-holder directly or with the sector in England that widely. Our research indicates that there have not been any substantial problems in Scotland.

That does not mean that there will not be instances in which individual publicans who operate with a tied lease are upset about the arrangements with their landlords—far from it. I recognise that that can happen, but I cannot say that I have evidence to lead me to conclude that there is a systemic problem in Scotland that needs to be tackled.

I have one last question. Given the evidence that has been submitted that highlights the allegedly very poor income levels of a substantial number of tied tenants, regardless of the bill, is there a case for the Government carrying out further investigations into that, just to look at what income levels and so forth should be?

There could be. I would want to see an evidence base that suggests that there is an issue that we need to look at. When I met Mr Bibby to discuss the bill, he told me that it is a challenge. The Scottish Licensed Trade Association has suggested that it could be a concern, and I heard that reiterated to the committee. If we can get beyond the anecdotal and have an evidence base, of course we would be willing to prosecute and look into that. If it emerged that there was a challenge, we would take the action that we considered necessary.

I think that you said in your opening remarks that you are awaiting the committee’s report before the Government takes a view on whether to support the bill. You also have your research that was published in 2016. In your written memorandum to the committee, you say that you believe that

“a more detailed analysis is needed on the issues highlighted in this submission before we are able to reach a view on the Bill.”

Who do you anticipate will undertake that detailed analysis?

I go back to the point that, if I were sitting before you and proposing legislation, it would be eminently reasonable to ask me to provide the evidence base. However, I am not proposing the legislation.

That said, the committee—it is entirely for the committee to do, of course—can say in its report that, after having taken that evidence, it recommends that the Government look into X, Y or Z. We are accountable to Parliament, so if a recommendation came from Parliament, we would have to take it seriously and look into it. However, speaking frankly and candidly, it is for the proponent of the bill to do that, which in this instance is Mr Bibby.

Are you saying that, in the absence of that detailed analysis, you would not be able to—[Inaudible.]—the bill?

I beg your pardon? You broke up a wee bit there, Mr Wightman.

In your written submission, you say that you

“believe a more detailed analysis is needed”

before you

“are able to reach a view on the Bill.”

The obvious logic of that is that, if there is no such detailed analysis, you will not be able to form a view.

That is probably the case, but, of course, the committee’s report will form part of the detailed analysis, so I want to see what it says.

In the same paragraph, you say:

“Any further consideration would also be subject to the Scottish Government’s assessment as to whether the Bill would be within the legislative competence of the Scottish Parliament.”

Neil Bibby has stated that, in his view, it is. The Presiding Officer has also said that, in his view, the legislation is within competence. What issues are you worried or concerned about in relation to competence?

I am not massively worried about competence; it is just a general observation that such an assessment would be needed. Clearly, some of the issues start to interact with the realm of commercial relationships.

There could be an issue—I am not saying that there definitively is—in that, under the terms of the Scotland Act 1998, the bill could start to impinge on some reserved areas. That is all there is. It would be incumbent on us to have a look at the issue and ensure that we were satisfied, as we would do with any legislation. If we introduce proposed legislation, we have to look at competence through our legal directorate and consider whether it is compatible with what is devolved and reserved.

I do not have anything specific to say to you in that regard. It was just a wider observation on what it would be incumbent on us to do.

I just want to be clear about the future process. The member in charge of the bill is satisfied that it is within legislative competence, as is the Presiding Officer. In the light of those statements, I do not think that the committee will take specific evidence on the question of competence. Can we take it that, as you said that

“Any further consideration would ... be subject to the Scottish Government’s assessment”,

you will undertake that assessment, regardless of what the committee says?

12:00  

If the bill goes past stage 1 and gets to the amendment stage, for example, we would need to consider it in that context. I guess that I was alluding to where the bill will proceed to.

That is an important point, because, although a bill is within legislative competence on introduction, amendments may change that.

I think that Dr Burgess wants to come in.

Yes, very briefly. The exchange has covered most of the point already. As the minister said, we have not done a detailed analysis of legislative competence, which we would do with a Government bill. We do not at this stage see any particular showstoppers and, as Mr Wightman said, the Presiding Officer has given his certificate in relation to the bill. There could be changes at stage 2, so we will look at the bill in more detail. We have not identified any legislative competence issues at this stage.

I invite Gordon MacDonald to ask the last questions in this evidence session.

Thanks, convener. The Business, Energy and Industrial Strategy Committee at Westminster carried out an inquiry into the pub code and found that, of 601 full responses, only 37 tenancies had decided to move over to market rent only, which was about 6 per cent of the total number of inquiries. Has the minister any thoughts on why the conversion rate was so small?

I will be candid: I do not have thoughts with regard to the conversion rate. I observe that the inquiry rate and the conversion rate represent a minuscule proportion of the overall number of properties that are eligible.

In my figures, in the first three and a half years, only 1 per cent of the total in-scope properties in England and Wales have moved to the market-rent-only model. If we look more widely at the dispute mechanism in the legislation, the numbers are still fairly low: roughly 3 per cent of the total that are in scope have had issues that have moved to dispute adjudication and arbitration.

I do not know whether that reflects the point that I made at the outset about what the problem is that we are seeking to resolve. It is clear that there are instances, small in number, where some have sought to move to a different form of tenure, and some have sought to utilise a statutory mechanism to move concerns to arbitration. However, the number is very small. Does that suggest that there is not a systemic issue but a small number of issues that need to be ironed out case by case? That is potentially so.

We cannot make that extrapolation across the board entirely, because Scotland has a different market and a different form of tenure. However, if the pattern were to be repeated in Scotland, it could be that six tenants each year would move to a market-rent-only agreement. Does that require an entire legislative structure, setting up a statutory adjudicator and legislating for guest beers and so on? I am sceptical as to the necessity of such an arrangement, as you can probably discern from my responses. However, if the case can be made, of course we have to listen to it.

Tied pubs have always been an opportunity for low-cost entry for entrepreneurs to start up their business. There have been suggestions that, if the bill were to go through, we would see the growth of managed pubs by the pubco. Do you share the concerns that opportunities for young businesspeople might be taken away?

I concur that the model allows young people to enter the market and, once they are in business and are established and have experience, they move on to a different type of tenure. There is a good sound rationale for the model. To be fair, Mr Bibby’s memorandum makes the point that the model works for most people, and I think that that is suggested by the evidence.

If we were to start to see a narrowing of such opportunities, as has been suggested—it is only a suggestion that has to be prosecuted further—that would be a cause for concern. Anyone would be concerned about a narrowing of opportunity.

Do you agree with the former Labour shadow business minister, Gill Furniss, who said to the licensed trade press:

“The code is not fit for purpose and the Government must urgently review it”?

Bearing in mind that the member’s private bill is based on the English legislation, should we be wasting time processing legislation that is based on flawed legislation from south of the border?

Even proponents of the legislation have expressed concerns about what has been put in place south of the border. There are some tweaks and differences in the bill but, by and large, it replicates the model that was put in place south of the border. The concerns that have been expressed have to be heard and taken seriously.

With regard to whether we should use our time to consider the bill, Mr Bibby is perfectly within his rights, as is any elected member of Parliament, to bring forward proposed legislation. He is entitled to do so and has got to this stage. I guess that we have to use some of our time to do a little bit, at least.

I have a final comment. Last week’s evidence was pretty polarised: on the one hand, we heard that the bill is the best thing since sliced bread and, on the other, we heard that it is a disaster waiting to happen. Where do you sit? Do you lean to one or the other, or do you position yourself slap bang in the middle?

I wish the committee well in squaring that circle, convener. That is where we are. There are strong opinions, albeit I contend that a fairly small number of institutions and organisations are involved. I recognise that the bill is not likely to draw the attention of the wider public but, for the organisations that are involved, the views are pretty polarised. I can only go with what I said at the outset of my evidence: we are neutral on the issue. If I were to go further, I am probably sceptically neutral. If the proposition is for change, it has to be a good one. I am open to hearing if that might be so, and I look forward to seeing what the committee’s stage 1 report says.

There are no other questions from our members, so that concludes our evidence session. I thank the minister, Aileen Bearhop and Dr Burgess for taking part. As previously agreed, the meeting will now move into private session.

12:09 Meeting continued in private until 12:50.