The value of the whisky industry to Scotland is being questioned

ON the banks of the Forth-Clyde canal just outside the small town of Falkirk lies the empty shell of Rosebank distillery. Closed for more than 15 years it is still affectionally referred to among Scotch whisky enthusiasts as the "Queen of the Lowlands".

Despite its unique character, Rosebank was one of four distilleries closed in 1993 by United Distillers, now Diageo, as part of a review of its Lowland operations. It failed to make it into Diageo's Classic Malt range and was moth-balled after it was decided to retain the more picturesque distillery Glenkinchie

A few summers ago as part of an "open doors" weekend a handful of visitors were allowed inside.

"Part of me wishes they had kept the doors closed as it was a sad sight," says one. "Any hope of a resurrection in its present form has long gone I fear ... it was very sad to see the place like that."

In whisky circles there is still talk of reopening the 169-year-old distillery and reviving "the spirit of Rosebank", but it seems unlikely. This week, as the row over Diageo's decision to close its Kilmarnock plant and shut its Port Dundas distillery in Glasgow rumbles on, the recent history of Rosebank becomes ever more pertinent.

Alex Salmond, the First Minister, has already signed a petition against the closures and has pledged to join a protest march being organised by the local council for later this month. As Diageo prepares to mount its defence, industry insiders are beginning to ask whether the relationship between the Scotch whisky industry and the country in which it is produced in is reaching breaking point.

"The bad publicity surrounding Diageo isn't helping," says Mark Reynier, owner of Bruichladdich distillery on Islay. "We keep hearing about efficiencies and cost savings and I can understand these decisions, but it is a legitimate question to ask where are we going with this? Are we (the Scotch whisky industry] going to follow the model of the beer industry and refocus the business around a tiny number of mega breweries? If that is the case then look what happened to regional brewers – they have all but disappeared. It's not too far-fetched to imagine Scotland ending up like Ireland with just a handful of whisky distilleries.

"We keep hearing from the Scotch Whisky Association about the number of jobs the industry supports and the amount of revenue it generates, but nobody asks the question, what does Scotland get out of the whisky industry? The reality is, not a lot."

It is this very question that senior sources have told Scotland on Sunday is vexing economists and policy makers. Figures from the Scotch Whisky Association show that the industry supports 10,000 jobs in Scotland with a further 30,000 relying on it as farmers, suppliers and distributors. In the UK it is one of the top five manufacturing earners with annual export revenues in excess of 2.8 billion. The SWA points to the fact that more than 800 million a year is generated for the government in excise and duty and VAT while tax accounts for more than 70 per cent of the retail price of a typical bottle of Scotch whisky.

But sources close to the industry argue that most of the tax is passed on to the consumer and not paid by the distillers.

One source says: "Nearly 90 per cent of Scotch is exported overseas so the tax is raised overseas. I keep hearing about how high the duty is on a bottle of Scotch but that cost is passed on to the consumer. The industry is very happy to exploit the Scottish-ness of their product but when it suits them they are also happy to move the value added part of the industry, packaging and bottling, out of the country."

Already between 15 per cent and 20 per cent of Scotch whisky is bottled overseas. Whyte & Mackay has recently commenced bottling for domestic Indian consumption at its plant in Maharashtra, western India, and analysts say there could be more.

Brian Donaghey, the managing director of Diageo Scotland, has insisted the company is committed to keeping jobs north of the Border but he has also argued that bottling could be moved outside of the country.

"Scotch has to be distilled and matured in Scotland, but it doesn't have to be bottled in Scotland," he says, arguing that Diageo faces pressures to export in bulk and package somewhere near the local market.

And Des Browne, the former defence secretary and Labour MP for Kilmarnock and Loudoun, has also warned that he believes the industry may be seeking to loosen its ties with Scotland and to transfer packaging and bottling overseas.

"If the industry is allowed, by this decision, to break the link between Johnnie Walker, the biggest volume seller and best-known Scotch whisky in the world, and its roots in Kilmarnock, I predict we will see, within my lifetime, the breakage of the link between the packaging and the marketing of Scotch whisky wholesale and Scotland itself," he said.

One area that might be a possible source of revenue is water. The Scotch whisky industry is reliant on water. It uses water for both the production of whisky, around a third of a bottle is made up of water, and cooling its stills.

The Scottish Environment Protection agency (Sepa) has already started the process of charging for water but in June it opened a consultation with the industry to amend its fees and charges.

According to Sepa, the focus of the consultation is to "further develop the risk-based approach to charging and to ensure that efficiencies in the way Sepa undertakes its work are passed on to stakeholders."

While nobody is suggesting that the cost of water could rise dramatically, there are rumours of a "water tax" designed specifically to extract more revenue from the Scotch whisky industry.

Sepa has denied this, but if it was implemented, one distillery owner says, its impact would be "catastrophic". He says: "This is just another example of the nonsense that is swimming about within the whisky industry just now. Here is an industry that is integral not just to the Scottish economy but to the UK economy as a whole and people in this country just don't get it.

"It's an absolute absurdity. How we can go around the world asking other markets to reduce the level of taxation when our own politicians are looking at increasing the tax, it is absolutely crazy."

Leonard Russell, the owner of Glengoyne distillery, says any future tax rises would have to be passed on to the consumer to safeguard the viability of the industry.

He says: "The industry would simply pass on the extra cost to the consumer. The reality is that the more tax you levy on the Scotch whisky industry the result will be that the larger companies will look to move their profits offshore.

"This is a centuries old industry that is very reliant on water. We create huge amounts of export revenue which helps keep the UK's balance of payments in check. Why tax the goose that lays the golden egg? I find it very upsetting."

The move would also come at a time when the industry is beginning to feel the pressure from the economic downturn. Exports of Scotch have grown from 2.37bn in 2005 to 3.2bn last year but since the credit crisis, Scotch has started to feel the chill winds of the global downturn.

The Spanish and Russian markets have been particularly hard hit, as have duty-free sales. There are also signs of big drops in demand for high-value Scotch favoured in Asia, and there is evidence that other markets, including America, are trading down.

As a spokesman for the SWA says: "This industry has invested more than 500m in Scotland in the last five years. Where that investment has involved the construction or upgrade of distilleries where possible we have used local businesses. The industry generates 800m of salaries in Scotland and 1.3bn in the UK.

"We spend almost 700m on local goods and services in Scotland and more than 1bn in the UK. More than 100m is spent on purchasing cereals in Scotland while distillery visitor centres attract 1.2 million visitors a year. It's about time people started realising just how much the industry does for this country."