Unreasonable Negotiation

True Story:

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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.

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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.