Friday, 12 February 2016

Unreasonable Negotiation

True Story:

In my early years as a Strategy Consultant I and a colleague were travelling around the Far East whilst gaining an understanding of our client’s International Sourcing operations.  After moving between several countries in just a few days we found ourselves having dinner in down-town Bangkok and decided to get a Tuk Tuk ride back to the hotel.

We were savvy enough to know that we should agree the price for the journey in advance so we hailed our first Tuk Tuk driver and duly started negotiating.  We weren’t going to be taken for mugs and we knew the price in Baht for the journey shouldn’t work out at much more than about £1. We weren't surprised to be offered some outrageous prices but - with a long line of drivers willing to haggle for our business - we merrily dismissed driver after driver as we waited for one to accept a reasonable price.

Eventually we persuaded a driver to accept our £1 and take us to the hotel.  At the end of the journey he pleaded with us for a decent tip, explaining passionately that he had a wife and kids to feed and we really were paying too little for the journey. By this stage, brimming with confidence in our negotiation skills, confident we had paid a healthy full fare and determined not to be taken as a pair of fools at the last hurdle, we airily waved him away and retired to the hotel bar.

Here’s the rub: the following morning we realised that - having been through several currency changes in the preceding days - we had completely messed up our exchange rate calculations. What we had thought was £1 was in fact only 10p.

Apart from the obvious lesson about supply and demand - there was an over-supply of Tuk Tuks which placed us in a very strong negotiating position - this experience taught me something that has served me well in negotiations ever since. We were being unreasonable in our negotiations but because we believed we were being reasonable we stuck by our guns.  If we had known the correct exchange rate - if we'd been reasonable negotiators - we'd have struck a far worse deal.

Note: It's been pointed out that I and my colleague were being dicks in this scenario. I kind of assumed that was obvious but if it needs stating then yes, we were being dicks. Bear that in mind as you follow this analogy through.

I'm reminded of this experience as the increasingly public and fraught fiscal framework negotiations between the UK and Scottish governments drag on. It's clear that agreeing what's reasonable - what satisfies the condition of "taxpayer fairness" while still honouring the Smith Agreement - is the source of the impasse.

The crux of the matter in my view is this: the Scottish Government are not being reasonable, which is a completely appropriate negotiating position to take to get the best deal for Scotland.

If you're not familiar with the background on the Smith Agreement and the dynamics of the Barnett Formula now might be a good time to read my last blog post (Barnett Fair?); from here on I'll take an understanding of these issues as read.

Both parties agree that a Block Grant will remain and it will be reduced by an appropriate amount on day one to ensure that the first "no detriment" principle is met. The Block Grant's year-on-year changes will continue to be calculated according to the Barnett Formula which ensures another key principle of Smith is delivered: the Barnett Formula remains.

The stumbling point in the negotiation appears to be how the amount by which the Block Grant is initially reduced is indexed over time.  This figure is termed the Block Grant Adjustment (BGA) and all Smith said about this was that it should be "indexed appropriately" and that this should be "fair" to both parties.  It's critical to the understanding of what is reasonable here to be aware of two points;
  • The "no detriment" principles outlined in Smith related to the initial transfer of powers and the knock-on implications for one country of another using those powers. There is nothing in Smith that suggests there should be no detriment as a result of reducing the scale of the (spend indexed) Block Grant in return for giving Scotland the upside (and downside) of complete control and retention of further revenues

  • The issue being negotiated is not how the "revised base" Block Grant is itself adjusted (this continues to be calculated using the Barnett Formula with all of its inherent flaws and weaknesses), the point at issue is the indexing of the Block Grant Adjustment

Quite simply: the Smith Commission left this indexing open to negotiation and the only guidance given was that there should be an "appropriate" index and that it should be "fair" to both parties. 

So, recognising that this is not the same as being wrong in their approach to negotiation, it does appear that the SNP are being unreasonable.  The "no detriment" principle was specified clearly enough for it to be pretty clearly unreasonable to claim that it's fair to apply it to indexing of the Block Grant Adjustment. 

Again: "no detriment" was specifically defined to apply to the impact of "initial transfer" (i.e. day one) and "policy decisions that affect the tax or expenditure of the other". There was nothing to suggest that shifting the mix of revenue from Barnett indexed to retention and control of own taxes should in itself be designed so as to ensure "no detriment". Indeed it could be argued that the whole point of devolving greater control and responsibility is to make us more exposed to and aware of the impacts of our particular demographic challenges.

To sum up where we now stand;

  • The SNP's negotiating position is unreasonable - they are attempting to appropriate the "no detriment" clause and apply it in a way it was never intended to apply.

  • The SNP's negotiating position is hypocritical - they are arguing to retain some of the benefits of pooling and sharing that they've spent their political lives claiming are non-existent.

  • The SNP's negotiating position is nevertheless appropriate - it's a negotiation and their job is to get the best deal for Scotland; being unreasonable (and hypocritical) is probably necessary to achieve that

Of course the SNP can't lose here. If no agreement is reached they can unreasonably (but credibly) accuse the UK Government of reneging on the Smith Agreement; if they succeed in getting an unreasonable deal it will be in Scotland's best interests - so they'll be applauded for negotiating the 10p Tuk Tuk ride.

Nobody said life had to be fair.


Anonymous said...

For a party that is convinced destiny is on its side and that independence is now a mere formality within a few short years, the SNP seem desperate to get such an advantageous deal that will shape Scotland for decades to come but, if you believe the hype, has no real long term future and will be null and void upon independence.

If I were being cynical, I'd think they're not quite so confident about independence as they make out in public, but the leadership haven't got the nerve to tell that to the rank and file support base.

Indeed, you could argue the worse the deal the more advantageous it would be to them and their cause.

Tubby Isaacs said...

First post here by regular reader.

Simple question- does anybody actually want Scotland taking on England in "tax competition"?

Unknown said...

Economists looking to game theory know there is a clear distinction between games with a single play and one where the game is repeated time and again. Where there is a single one off negotiation, the best approach can often be to take a credible and unreasonable position. In your negotiation with the Tuk Tuk drivers, this was fine. You were never going to see them again and your unwittingly unreasonable stance made the deal a great one for you and a poor one for the driver. OK, fair enough. But politics is a different beast. In politics you must repeatedly negotiate with the same parties, gain trust and trade off benefits of an unreasonable position against the diminished trust you will face going in to future negotiations.

Now for the SNP, this matters not one bit. The fight for a good deal actually pays off doubly if it can create a hostile response and a lack of trust. The understandable resentment that an unfair deal will create amongst the English voters can only enhance the division, a key aim of the SNP.

Labour and the other unionist parties face a different problem. They want the union to work and presumably think that staying in a functioning union is in Scotland’s interests. Creating resentment is not in the long term interests of the union and not in the interests of Scotland either. A genuinely fair result that works for both parties is in Scotland’s interests.

For me it is disappointing then to see Labour politicians supporting the "unreasonable” stance. No matter how bad the figures look for the independence cause, and will do for the foreseeable future, if we end up getting a deal that looks like one party gaming an ongoing advantage at the expense of the other, it is not good in the long term. Labour lose either way. If the deal breaks down, they are blamed as unionist stooges. If the unreasonable position wins, they end up looking like third rate Nats but without the passion.

Kevin Hague said...

Fair points - but ultimately it's a negotiation where Scots will thank the party that cuts them the best deal. Reasonableness is not necessarily the best way to achieve that, even allowing for the need for ongoing negotiation imho.

I speak as someone who often puts other people in to bat for me in negotiation because I know they will be far less reasonable than me

Unknown said...

We can always pull an unreasonable stance to get a better deal. Correct, and understood. It works, we know that. But there comes a point where the voter response to being ripped off in England means that it is overwhelmingly in a Westminster politician's electoral advantage to take a very unreasonable stance themselves. That would be fair too presumably. Who has the most to lose and / or gain from the negotiation will often tell you who is going to get the maximum payoff from the unreasonable stance. For the SNP it is a win either way - divisiveness is the name of their game. For everyone else?

Ron Sturrock said...

Both sides are inching towards a deal with slight concessions so far, despite the public rhetoric.
Part of the deal should be the requirement for SG to have a fully functional SFC.

John Silver said...

Thanks Kevin,

I would be interested in your view of the reasonableness etc of the UK Government position in these negotiations.

FF said...

As you point out this is a haggle. You negotiate the best deal you can and should be tough. But that also means there is no real principle involved. There is no success for a negotiator if they don't work out a deal that sticks.

The difference with the tuktuk example if that you will never see the driver again, but the Scottish government will be stuck with their UK colleagues regardless of the outcome of the negotiations.

Incidentally, it's bad manners for wealthy foreigners to squeeze tuktuk drivers to the last baht. You do so if you don't care about your reputation.

Garve said...

I think it's wrong to consider that the SNP are being hypocritical. We've had a referendum, the result was to stay part of the UK so taking part in the 'pooling and sharing' is perfectly logical.

If you argue the SNP should reject that then you'd need to argue that they refuse to allow the British Army to defend us and refuse to let UK embassies represent us. If we're part of the UK that's not credible.

I do agree with you and Niall in that it's hard to see this being anything but a winning situation for the SNP however it turns out.

FF said...

There's a contradiction between the SNP "getting the best deal for Scotland" and "we was robbed". They may not have decided yet how they are going to spin it.

bucksboy said...

All this over the three amigos and their 'vow', without which the No vote is liable to have been carried anyway. I remember the David Cameron bloke, the names of the other two genuinely escape me and I have zero motivation to google them :-)

All this division-mongering is a bad business but can anyone blame the SNP architects of it if for all their bleating and unreasonableness they are then rewarded with a ever more.

They know WM is largely in a lose lose situation, be seen to be mean to Scotland and the SNP grievance machine gets oiled for decades to come. Lean towards appeasement and sow discontent elsewhere in the UK.

My hope is the SNP era will ebb and with it replace the grievance narrative with something more inspiring.

Great article and comments BTW.

David GREEN said...

Reasonableness, sadly, is like beauty: it exists in the eye of the beholder. Having an opinion about the reasonableness, or lack of, of the SNP is interesting, but ultimately beside the point. The issue that should never be lost sight of is that the SNP exists, first and foremost, to destroy the Union. Everything is subordinate to that objective. Currently, the collapse in the oil price, and associated tax revenues, makes FFA and second referendum unattractive, because a Yes vote would be a disaster. Instead of Sturgeon moaning about a hypothetical loss of £3 billion over 10 years, she would, on all appearances, be preparing for a loss of £80 billion over 10 years. Even she knows that her reputation would be trash for ever and a day if she allowed the Scottish electorate, fired up by SNP rhetoric, foolishly to vote for that outcome. So, she and Swinney must turn to short-term games. If the current Treasury proposal is actually better than Barnett, then rationally it makes sense for Sturgeon and Swinney to accept. However, that means treating with the enemy. It may be better to stick with rejection, or so the calculation goes.

Everyone seems to assume the SNP benefits from rejection. It may do, in the short term. But consider the longer term. Rejection would result in halting the Scotland Bill. It might take a decade to resurrect it, if ever. Until the oil price rises, the SNP is stuck. It will rail against Westminster and the Conservatives, but who in rUK will give a proverbial. The Conservatives effectively have no seats to lose, and have Labour pinned up against a wall. Ironically, Labour is kept pinned because of the SNP. Scotland soldiers on with the Barnett formula, but maybe rUK applies the Barnett squeeze. One more year and Trident is renewed, and two more years and much of the North Sea oil infrastructure will have decayed beyond the point at which it remains viable. From an rUK point-of-view, that should give Scotland a kick in the scrotum. After that, what's the point of being an SNP MP at Westminster? You're completely ineffectual, and destined for permanent opposition. The only ones who will stand again in 2020 will be the complete jobsworths. Shades of old Scottish Labour. This situation could last for 20 years without much change. Sturgeon, Swinney and Salmond will all go, and Scotland will be poorer. Even now, it makes little sense for outsiders to invest in Scotland, and SNP policies will only make it worse over time. Take a look at Quebec, where the pro-independence Francophones have been unsuccessful at securing independence, but have progressively impoverished both Quebec province and Montreal by their obsession. To what effect?

Kevin Hague said...

John Silver - apologies didn't reply sooner. tbh I think the UK govt position is eminently reasonable, I really do.

betsomo said...

Hmmm. Not convinced SNP are winning anything here. Their hypocrisy has been happily exposed and there could actually be more than one (hypothetical)supporter out there with head-spinning at the turnaround to adopt austerity.

If they accept a deal they are onside with a Tory government, if they fail and the deal falls through they are shown up for turning down the extra powers they always claimed to pursue. Either way I could see them being kicked around the political block at least.

I appreciate they will adopt some crazy spinning but they're losing themselves with the different positions they are taking by the hour. And they have gone wonderfully quiet of late. They have some serious bad press ahead of them and some fantastically sticky corners to twist out of. Terrific blog, thank you

Paul Robson said...

"For the SNP it is a win either way - divisiveness is the name of their game."

Down here in England AFAICS it's worked. English people, rightly or wrongly, are associating "Scotland" with "the SNP" are and totally fed up with them. If an independence vote included the English Yes would walk it.

I'm not saying I agree with it, but that's how it's going.

Paul Robson said...

@betsomo "Hmmm. Not convinced SNP are winning anything here. Their hypocrisy has been happily exposed "

Doesn't matter. I think the SNP is now pretty much a religious belief, not a logical one. The delusions the Nats go through to prop their world up (e.g. Oil doesn't matter, it's just a bonus - see umpteen blog entries on that) make anything Lab or Con do look easy.

Anonymous said...

Garve the 'pooling and sharing' is indeed logical. That has to be a two way street though. The SNP want to make it a one way street.

Anonymous said...

The negotiation between the Scottish Government and the U.K. Government is not (or should not be) like your negotiation with the Tuk Tuks. This is not a negotiation between two independent parties. Both governments are Scotland's government. Both should have the interests of Scotland at heart. It seems to me that the UK government needs to acknowledge the extent to which its economic power determines the growth (or rather the relative decline) of the Scottish tax base, and so it should agree to take on the risk that Scotland's tax base will decline. Pushing the risk onto the Scottish government has the appearance of bad faith on the part of a Tory administration that feels it has nothing to lose in Scotland. After all, if it does take on that risk, then if Scotland's tax base does not follow its trend of relative decline compared with the U.K. as a whole, but begins to grow, the present UK administration could then claim the credit for a historic reversal, and also would pay nothing extra to Scotland. The U.K. Government's current position seems to be that it has no confidence its policies will reverse Scotland's relative decline, and it's willing to cut and run with what it can lay its hands on.

Let's stop fighting the referendum, and focus on the issue in hand - where the UK government has economic power, it should also take economic responsibility.

Anonymous said...

And where it is ceding powers there should also be an equivalent transfer of responsibilities, for better or worse. Scotland appears to be arguing it should get all the benefits of those new powers, yet carry none of the risk.

Anonymous said...

I would think that where the Government has economic power (for the entire UK), it does indeed take economic responsibility (for the entire UK). If the Scottish Government exercises it's prerogative and differs from that, then it seems fair that they reap the benefit of their superior expertise. Or not.

Anonymous said...

"benefits of new powers"? I think we should start to question that. Perhaps I shouldn't boast, but I've been to France. They have all the "powers" they could have, and life seems strikingly similar to contemporary Scotland.

David GREEN said...

Anonymous at 17.42 is naive, for at least two reasons. First, it is a simple question of fact that Scotland and its economy physically abut an economic power that is at least 10x larger. The UK Government technically governs in the interests of all, but with rUK constituting 90+% of the economic power, that is where political power resides. It is this that the SNP seems to dislike, at least at the emotional level. Fair enough. The majority of rUK voters don't vote Conservative either. But the SNP solution is a flight of fancy. The large difference in economic clout will never go away. But Scotland will be on the end of rUK largesse as long as it stays united. They have done pretty well to date. Independence eliminates the rUK largesse at a stroke and substitutes voodoo economics in which a small centralised, highly-taxed economy, separated from its most important market (i.e. rUK) and others by distance, competes with its economically more powerful neighbour. Of course rUK affects what the Scots can do, but it always will. Get over it. Second, it is the Scottish Government that has no confidence in its ability to stem its relative population decline. The rUK doesn't give a damn. It is for the SNP to realise that staying in the Union is the best way of blunting economic decline. But what rUK doesn't want to do is cough up endless cash for the decline if powers are devolved. Devolution carries costs. The SNP seems to becoming increasingly unstable in its views of the Union. Only this morning, we have Swinney pleading publicly with Osborne to alter UK Government taxation policy to help Scotland. Tomorrow, he and Sturgeon will be ripping Osborne's hands to shreds. This level of schizophrenia is very hard to deal with. Like the real thing, SNP policy is now increasingly characterised by its delusions.

Birgus Latro said...

This failure of the UK and Sco Govts. to see eye to eye represents but a small taste of what the negotiations would have been like in the event of a Yes vote 18 months or so ago. It would've been absolutely brutal - the UK Gov. currently has to tread an extremely fine line and adopt sometimes semi-contradictory positions to keep all components of the Union sweet. With a Yes vote, that vanishes.

Anonymous said...

I fear that as long as the SNP remains the dominant force in the Scottish parliament, then that part of the Union will never be kept sweet. No matter what the UK government concedes, to the SNP it will simultaneously be resented as a hand-out and complained about for not being enough.


Anonymous said...

Anonymous 12.15, 15 Feb: it's not a question of the Scottish Government's expertise or otherwise in running the economy or setting taxes. The Scottish government has a very limited set of economic powers; the UK government has vastly more influence over Scotland's income tax base (both in terms of its wealth and numbers) than the Scottish government will have even after the implementation of the Smith Commission proposals. It makes no sense in terms of fairness or otherwise to require Scotland to take on the political risk arising from UK government decisions that result in a declining Scottish tax base.

David Green: at present the UK government is a government of Scotland. You seem to be saying that it will always do us over if it can. Are you arguing for independence? I'm not, though if I saw things your way, I'd be arguing for revolution.

Birgus: please stop fighting the referendum; that day has passed

Anonymous said...

"simultaneously be resented as a hand-out and complained about for not being enough"

Perfectly put.

Anonymous said...

Probably not, Tubby.
It might work, though? It does for say - the Isle of Man, or the State of Delaware in the USA. Maybe the question is: is Scotland too big to be a tax haven?

David GREEN said...

To Anonymous 15.13. My theory of the institutions of democratic representation in the UK (and much democratic practice elsewhere) is that it attempts to balance individual interests. It does so using basic utilitarian principles, where the greatest good of the greatest number is an important starting point. Universal suffrage is based on one vote for each person. At the same time, society has to protect against the tyranny of the majority, where it it involves unacceptable treatment of a minority. It does this through acceptance of Bills of Rights, etc. Practical application of universal suffrage nearly always sees the emergence of parties, where some individual variation is surrendered for a set of core beliefs and interests. In a society such as the UK, there are about ten parties of various size, but only six gained serious traction in Parliamentary elections (in order of declining votes: Conservatives, Labour, UKIP, LibDem, SNP, Green). Given that the Conservatives only won 36.8% of the vote, it is incumbent upon them to act in the interests of all. However, their view of the interests of all differs from Labour, etc. In a crude way, the interests of those who did not vote Conservative is protected over the medium term by the opportunity to turf the Conservatives out and substitute a Government of an alternative complexion. The system is grossly distorted by the first-past-the-post system operating in constituencies, but it has delivered stable, largely two-party government, for 300 years. The political forces in play, including party alliances, have been approximately balanced over that time. When economic activity was distributed widely over the UK landscape, regions of shipbuilding, mining, etc. represented numerous counterbalances to the economic pull of the South East of England. Changing industrial landscapes have altered that balance and with it, the relative rise of London and the SE. This makes it important for economic counterbalancing to occur. It then becomes an interesting question as to how that is best achieved; in this case, for Scotland. It might be to secure strong representation within the UK two-party system, and in the various cabinets that form over the years. Scotland has done pretty well under this system. However, with the emergence of North Sea oil, an alternative model was placed before the Scots: abandon the existing parties, and strike out with a new, nationalistic party. The proposition has proven remarkably successful, and has largely destroyed Scottish representation at Westminster within the two major political parties. At this point, Scottish representation, previously dealt with within the Westminster two-party system, becomes much more adversarial. But those who chose nationalism are in danger of discovering an unpalatable truth: once political comity is abandoned, looking after Scotland is only marginally in rUK's interest. The political interests of Scotland within the two major parties, which were broadly recognised, have been abandoned for a straight-out collision in which one Government is economically 10x the size of the other, and where the larger stands physically between Scotland and the rest of Europe. I personally think that this will be seen, over time, as the Scots going down a political blind alley. For all its faults, it would have been better to have broad Scottish representation within the existing Westminster parties; particularly Labour and Conservative.

Anonymous said...

Specifically what is it you suggest the Scottish govt could do with greater powers? The noticeable lack of use of existing ones doesn't suggest a pent up flood of great ideas. I know you're probably speaking hypothetically, but if you want to persuade, rather than make excuses, go ahead.