COMMITTEE FOR ENTERPRISE, TRADE AND INVESTMENT
Report on the Committee's Response
to the Department of Finance and
Personnel's Review of Rating Policy
TOGETHER WITH THE MINUTES OF PROCEEDINGS OF THE COMMITTEE
RELATING TO THE REPORT AND THE MINUTES OF EVIDENCE
Ordered by The Committee for Enterprise, Trade and Investment to be printed 9 October 2002
Report: 1/02R (Committee for Enterprise, Trade and Investment)
COMMITTEE FOR ENTERPRISE, TRADE AND INVESTMENT:
MEMBERSHIP AND POWERS
The Committee for Enterprise, Trade and Investment is a Statutory Departmental Committee established in accordance with paragraphs 8 and 9 of Strand One of the Belfast Agreement and under Assembly Standing Order No 46. The Committee has a scrutiny, policy development and consultation role with respect to the Department of Enterprise, Trade and Investment and has a role in the initiation of legislation.
The Committee has power to:
- consider and advise on Departmental budgets and Annual Plans in the context of the overall budget allocation;
- approve relevant secondary legislation and take the Committee Stage of relevant primary legislation;
- call for person and papers;
- initiate enquiries and make reports;
- consider and advise on matters brought to the Committee by the Minister of Enterprise, Trade and Investment.
The Committee was established on 29 November 1999 with 11 members including a Chairperson and Deputy Chairperson and a quorum of 5.
The membership of the Committee is as follows:
Mr Pat Doherty (Chairperson)
Mr Sean Neeson (Deputy Chairperson)
Mr Billy Armstrong*
Dr Alasdair McDonnell
*Mr Wells replaced Mr Campbell with effect from 3 October 2000.
*Mrs Courtney replaced Ms Lewsley with effect from 29 January 2001.
*Mr Armstrong replaced Mr Shipley Dalton with effect from 24 October 2001.
*Mr McMenamin replaced Mr Attwood with effect from 18 February 2002.
The Report and Proceedings of the Committee are published by the Stationery Office by order of the Committee. All publications of the Committee are posted on the Northern Ireland Assembly website: archive.niassembly.gov.uk
All correspondence should be addressed to the Clerk to the Committee for Enterprise, Trade and Investment, Northern Ireland Assembly, Room 424, Parliament Buildings, Stormont, Belfast BT4 3XX.
Tel(028) 9052 1230; Fax(028) 9052 1063;
Report on the Committee's response to the Department of Finance and Personnel's Review of Rating Policy
Appendix 1 - Minutes of Proceedings of the Committee relating to the Report
Appendix 2 - Minutes of Evidence
Appendix 3 - Written Submissions
REPORT ON THE COMMITTEE'S RESPONSE TO THE DEPARTMENT OF
FINANCE AND PERSONNEL'S REVIEW OF RATING POLICY
On 19 October 2001 the Confederation of British Industry (Northern Ireland) (CBI) wrote to the Committee for Enterprise, Trade and Investment expressing its concern at the potential removal of Industrial De-rating in Northern Ireland. The Committee met with the CBI on 30 January 2002 to discuss the issue and agreed to pursue the matter with the Minister of Enterprise, Trade and Investment. The Minister informed the Committee in his reply that the Northern Ireland Executive was planning a Review of Rating Policy in Northern Ireland.
On 27 May 2002 the Minister of Finance and Personnel, Dr Seán Farren, on behalf of the Northern Ireland Executive, announced to the Assembly that a public consultation exercise on the Review of Rating Policy had commenced. The review was to be wide-ranging and encompass many various issues related to Rating in Northern Ireland.
The only issue relevant for consideration by the Committee for Enterprise, Trade and Investment was that concerning De-rating for Industry. The Committee advertised in the Belfast Telegraph, Irish News, Newsletter and the Irish Times to seek comments on the Industrial De-rating element of the Review of Rating Policy. The Committee took written evidence from a number of organisations with a view on this issue (this evidence is attached at Appendix 3). The report does not include those replies that did not make substantive comment; however the Committee Clerk can provide a copy on request.
In addition, the Northern Ireland Hotels Federation copied its response to DFP, for information, to the Committee. It is not included in this report but is available on request from the Committee Clerk.
In addition to the earlier meeting with the CBI, the Committee supplemented this written evidence with a series of meetings with the Irish Congress of Trade Unions (ICTU), the Ulster Farmers' Union (UFU), the economist John Simpson and the Department of Finance and Personnel (DFP). The transcripts (Minutes of Evidence) from those meetings are attached at Appendix 2.
Industrial De-rating was introduced throughout the UK in 1929 mainly as a response to growing competition in markets for manufactured goods from foreign countries. It was also thought that manufacturing was a property intensive industry and that a property tax would bear heavily on that activity.
In the early 1980's the government recognised that the high cost of local electricity took the edge off Northern Ireland's industrial competitiveness. In order to address this problem the government agreed that Industrial De-rating was still required, although it had been abolished in England and Wales in 1963.
According to DFP statistics the revenue forgone as a result of this policy is £64.3 million per annum. As an illustration of the effect of this policy DFP claims that if £64 million were to be made available this could reduce the non-domestic regional rate by 16%.
Deliberations of the Committee
The evidence submitted fell into two main categories, those who felt that the financial resources raised by abolishing the current policy could be better utilised by the Executive, and those who wanted the current policy to continue.
Not surprisingly those businesses currently enjoying the benefits of Industrial De-rating argued for its continuance. The CBI, UFU, the NI Grain Traders Association, Bombardier Aerospace, GE McLarnon & Sons Ltd and NI Food and Drink Association argued that the additional costs of paying rates would have a detrimental effect on competitiveness and send some companies out of business. Bombardier quoted an estimated additional annual cost of £2 million adversely impacting their international competitive position and placing jobs at further risk. The CBI, in their supplementary evidence to the Committee, gave details of a survey carried out on their members. This survey concluded that only 8% of respondents believed that the abolition of Industrial De-rating would have no effect on their viability.
A differing view was put forward by both the Trade Union movement (ICTU) and economist John Simpson. In their evidence to the Committee both concluded that the current policy meant that financial resources were not being used to their best effect.
ICTU highlighted the £6 billion capital funding deficit which needed to be addressed by the Executive. The revenue raised by abolishing Industrial De-rating could go some way to helping fund government borrowing to deal with this capital investment need. ICTU also pointed out that the current Industrial De-rating policy was inconsistent with the Programme for Government's aim to promote a knowledge-based economy given that the businesses benefiting from de-rating were largely manual-labour orientated.
John Simpson's evidence to the Committee focused on the need to ensure fairness within industry in Northern Ireland. Many other industries such as tourism, financial services and those related to information technology did not benefit from de-rating yet made a significant contribution to the Northern Ireland economy. He also believed that the revenue raised from rating manufacturing businesses could be better utilised by the Executive, either in a more focused method to benefit the economy or by using the money as a lever for capital borrowing.
While concerned that businesses in Northern Ireland needed a competitive edge internationally, the Committee concluded that the arguments in favour of continuing Industrial De-rating in its current form were outweighed by those suggesting its removal. The blanket approach currently in practice meant that benefits to the manufacturing industry were spread too thinly and did not allow the Executive to focus resources were they were most needed. Other sectors of the Northern Ireland economy did not benefit from this concession meaning that the policy of Industrial De-rating was not fair in its application.
In addition, the Committee recognised that £64 million per annum added to the Northern Ireland Executive's budget would permit borrowing on an unprecedented scale to improve public infrastructure projects such as roads and rail networks which would benefit industry and the economy in the longer term. For example, much needed improvements to the Westlink in Belfast could have enormous benefits to all businesses in or those businesses with dealings in the Greater Belfast area.
The evidence from CBI and others suggested that an immediate end to Industrial De-rating would have disastrous consequences for many small industrial businesses. The Committee agreed with that sentiment and concluded that a phased approach to the abolition of Industrial De-rating should be considered.
The Committee did acknowledge, however, that the farming sector of the economy is vulnerable to even small variations in profitability margins. Given the dependence on agriculture in Northern Ireland as a source of employment and export revenue the Committee agreed that farmers and agri-food producers needed to be given special consideration in this review process.
The Committee also acknowledged the Executive's desire to promote more business start-ups (Programme for Government - Securing a Competitive Market (sub-priority 3) refers). The Committee is supportive of this concept and believes that Industrial De-rating should not be withdrawn from new small industrial businesses for a limited period of time.
The Committee has made five recommendations after considering this issue:
- The current policy of Industrial De-rating should be abolished.
- The current policy should only be phased out over a period of time. The Committee recommends that this period be 3 years (i.e. 75% concession for year 1, 50% for year 2, 25% for year 3).
- In order to encourage small business 'start-ups' the Committee recommends that new small industrial businesses be allowed a 3 to 5 year concession on their rates.
- A concession for de-rating businesses involved in the agri-food industry should be considered.
- The Department of Enterprise, Trade and Investment should consider the setting-up of a relief fund which will assist those businesses, particularly small businesses, most affected by the removal of Industrial De-rating in the short term.
PAT DOHERTY MP MLA
PROCEEDINGS OF THE COMMITTEE
RELATING TO THE REPORT
WEDNESDAY 30 JANUARY 2002 AT 10.48AM IN
ROOM 144, Parliament Buildings
Present: Mr P Doherty MP (Chairperson)
Mr B Armstrong
Mr W Clyde
Mrs A Courtney
Mr D McClarty
Dr A McDonnell
Ms J Morrice
Dr D O'Hagan
Mr J Wells
Apologies: Mr S Neeson (Deputy Chairperson)
In attendance: Mrs C White (Committee Clerk)
Mr M Anderson (Assistant Committee Clerk)
Mr R Anderson (Clerical Supervisor)
Miss A Fowler (Clerical Officer)
Dr P Gilleece (Assembly Researcher)
In attendance for the public evidence session at 11.08am: Dr I Morris, Mr M Ennis, Mr D Dobbin and Mr N Smyth (Confederation of British Industry (CBI)).
6. Industrial De-rating
6.1 A delegation from the CBI outlined their concerns at the potential reintroduction of industrial rating for businesses in Northern Ireland.
Mrs Courtney left the meeting at 11.40am.
Dr O'Hagan joined the meeting at 11.52am.
Dr McDonnell left the meeting at 12.19pm.
Agreed - to issue a press release supporting the continuation of industrial de-rating.
Agreed - to write to the Minister of Enterprise, Trade and Investment detailing the Committee's concerns and seeking his support within the Executive for the continuation of industrial de-rating.
TUESDAY 25 JUNE 2002 AT 10.22AM IN
ROOM 144, PARLIAMENT BUILDINGS
Present: Mr P Doherty MP MLA (Chairperson)
Mr S Neeson (Deputy Chairperson)
Mr B Armstrong
Mr W Clyde
Mr D McClarty
Dr A McDonnell
Mr E McMenamin
Ms J Morrice
Dr D O'Hagan Mr J Wells
In attendance: Mrs C White (Committee Clerk)
Mr M Anderson (Assistant Committee Clerk)
Mr R Anderson (Clerical Supervisor)
Miss A Fowler (Clerical Officer)
In attendance for the public evidence session at 10.53am: Mr B McClure and Mr S Pearson, Rating Policy Branch.
The meeting went into public session at 10.53am.
3. Rating Policy Review
Representatives from Rating Policy Branch gave a presentation on the Review of Rating Policy to the Committee and answered questions raised by Members.
Dr McDonnell left the meeting at 11.10am.
Mr McMenamin joined the meeting at 11.23am.
TUESDAY 3 SEPTEMBER 2002 AT 10.33AM IN
THE SENATE CHAMBER, PARLIAMENT BUILDINGS
Present: Mr S Neeson (Deputy Chairperson) Mr B Armstrong Mr W Clyde Mrs A Courtney Mr D McClarty Dr A McDonnell
Mr E McMenamin Ms J Morrice
Mr J Wells
Apologies: Mr P Doherty MP (Chairperson)
In attendance: Mrs C White (Committee Clerk)
Mr M Anderson (Assistant Committee Clerk)
Mr R Anderson (Clerical Supervisor) Mrs J Murdoch (Clerical Supervisor)
Miss A Fowler (Clerical Officer)
In attendance for the public evidence session at 11.10am: Mr J McCusker, Mr T Gillen.
In attendance for the public evidence session at 11.50am: Mr W Mayne, Mr G Shannon, Ms G Briggs.
6. Industrial De-rating
6.1. Representatives from the Irish Congress of Trade Unions gave evidence to the Committee on Industrial De-rating and answered questions raised by Members.
6.1.1. Representatives from the Ulster Farmers Union gave evidence to the Committee on Industrial De-rating and answered questions raised by Members.
Ms Morrice left the meeting at 12.05pm.
Mr Armstrong left the meeting at 12.25pm.
Mr McClarty left the meeting at 12.25pm.
TUESDAY 10 SEPTEMBER 2002 AT 10.42AM IN
ROOM 144, PARLIAMENT BUILDINGS
Present: Mr S Neeson (Deputy Chairperson)
Mr B Armstrong
Mr W Clyde
Dr A McDonnell
Ms J Morrice
Dr D O'Hagan
Mr J Wells
Apologies: Mrs A Courtney
Mr P Doherty MP (Chairperson) Mr D McClarty
Mr E McMenamin
In attendance: Mr M Rickard (Committee Clerk)
Mr M Anderson (Assistant Committee Clerk)
Mrs J Murdoch (Clerical Supervisor)
Miss A Fowler (Clerical Officer)
In attendance for the public evidence session at 10.42am: Mr J Simpson
The Committee agreed to open the meeting in public at 10.42am.
Mr Neeson assumed the Chair in the absence of the Chairperson.
Mr J Simpson gave evidence to the Committee on Industrial De-rating and answered questions raised by Members.
The meeting closed at 11.27am.
MR SEÁN NEESON MLA
MINUTES OF EVIDENCE
Wednesday 30 January 2002
Mr P Doherty (Chairperson)
Mr D Dobbin )
Mr M Ennis ) Confederation of British Industry
Dr I McMorris )
Mr N Smyth )
The Chairperson: Good morning and welcome to the Committee for Enterprise, Trade and Investment. Our findings on the effect of derating on industry may be shared with the Committee for Finance and Personnel because our remits overlap. We will hear your submission and then ask some questions.
Dr McMorris: Thank you for your invitation to give evidence. I will introduce our delegation. Mr Mark Ennis is the chief executive of Boxmore International plc, which is involved in the packaging industry. Mr David Dobbin is the chief executive of United Dairies, the parent company of Dromona Foods, which is involved in the food and agribusiness industry. Mr Nigel Smyth is the full-time director of the Confederation of British Industry (CBI) Northern Ireland. I am Ian McMorris of Ulster Weavers, which is in the textile industry. We represent a reasonable cross-section of the manufacturing industry.
I will give a general introduction and Mr Smyth will talk you through some PowerPoint slides. We will then take questions.
We first became aware of the rating review in the middle of 2001 and our members quickly raised their concerns about the implications of the review. There is already a high cost base to operating in Northern Ireland and we would like to draw the Committee's attention to the high energy costs. We will give some examples of the impact that that has had on our members. We also have additional transport, water and waste costs over and above the rest of the UK because of the relative remoteness of our markets. Northern Ireland used to be a low-cost employment area in the UK, but that is no longer the case. Employment is not readily available in many areas in Northern Ireland.
Invest Northern Ireland must find incoming projects in, for example, the new technologies and it must deal with the problem of incoming investment. Multinational plants here face competition in bidding for new projects and products from their parent organisations. These large organisations may be American or based in other parts of the world, and when their reviews are carried out they take the cost base and the profitability of operating in various countries into consideration. In some of these cases Northern Ireland has lost out because of factors such as the cost of energy. We are concerned about the additional operational costs here and see industrial derating as partly offsetting those.
In October we responded to the Committee by way of a paper, which you may have already perused, and I will now invite Mr Smyth to summarise the key issues that that paper addressed.
Mr Smyth: I have circulated a short slide presentation and will run through it quickly, drawing out the key points from our October briefing paper.
I will cover the question: does manufacturing matter? I will then discuss the current and future economic climate and go on to examine the rationale for derating the industrial manufacturing sector. Consideration will follow of the advantages the industry enjoyed in the past, which are now declining. I will then make some concluding remarks.
First, does manufacturing matter? It is fairly well known that in Northern Ireland 100,000 people are directly employed in manufacturing. The number peaked in the mid-1990s at around 107,000, but has recently fallen below 100,000. Manufacturing is a key sector for wealth creation. It is less well known that a significant element of the service sector depends entirely on the manufacturing sector. Services such as logistics, transport, cleaning, catering, and security relate directly to manufacturing. A wide range of services such as legal, financial and consultancy services also depend on the manufacturing base. However, in many sectors there are highly paid employees, which gives significant spending power in the Northern Ireland economy and underpins a broad range of jobs. We would estimate that around 40% of the private sector depends on a vibrant manufacturing sector.
That is important in providing a choice for the nature of work and career paths for people who want to go into engineering, processing or even research and development. It is also part of a balanced economy. None of our members believe that we should focus on one particular sector, whether it be services or particular aspects of manufacturing. We need a balanced economy to be able to share the risks and not become overdependent on any one sector. We also recognise that there is a transition to a more knowledge-based added-value economy. The economic climate is tough, and globalisation trends will continue. The key issue is the intensification of competition that is impacting on large and small companies. With the introduction of the euro, there is also a greater price transparency across Europe in the markets that Northern Ireland companies are competing for and investing in.
The manufacturing sector, in particular, has been exposed to the high strength of sterling - now into its fourth year - which in turn is having a significant impact on margins and profitability. More recently, many of our international markets have weakened and companies have to respond to that. With margins and profitability reducing, investment returns are becoming depressed. Indeed, investment intentions at present are running weak, not just in Northern Ireland but across the UK.
We are also in a position where Northern Ireland's cost base has become increasingly high - I will return to that point. Northern Ireland is losing its competitiveness in a number of areas. There is currently a great deal of global uncertainty. The rating review and its impact over the next four to five years has created uncertainty in the manufacturing sector for many companies that want to invest. It would be helpful to clear up where we are going on this.
We believe that the rationale for derating remains, and we have highlighted examples in our paper where Northern Ireland has become an increasingly high cost base. The Chairperson has referred to high energy costs, and Northern Ireland has the highest energy costs in the EU, despite what many people may have read in the 'Belfast Telegraph' last night. We have bigger risks which are caused by swings and movements in electricity prices in Northern Ireland. In January 2001 our prices may have been marginally below those of some European countries, but most manufacturing companies suffered price increases of between 15% and 28% last April, which is difficult to plan for. Costs are expected to come down this year, but we are at the top end of the spectrum if we compare costs to GB, the Republic and most of Europe. We look forward to the Committee's deliberations and report on energy, which it has been investigating over the past few months.
High transport costs have a significant impact. It is costly to bring in raw materials from GB, and also to get our products to markets. We also have higher costs for servicing technical machinery, requiring people to fly in to do those jobs. We have also provided evidence of higher insurance costs - a tradition in Northern Ireland - which impacts across the manufacturing sector.
We have produced the latest water costs figures from 1997. Water costs in Northern Ireland have continued to rise since then, and a major review in 1999 by the regulator in GB has shown an average price reduction of 12%. Northern Ireland water costs are probably the highest.
The final area I wish to discuss is that of waste management costs. By that I do not simply mean waste disposal costs. In the past 12 months our attention has been brought to the fact that we have some of the most expensive waste disposal sites in the United Kingdom. We also have limited facilities for recycling, because we are a small region, with the result that many companies have to export waste to Great Britain, thus incurring additional costs. There are, therefore, significantly higher costs in a range of areas.
Let us examine some of the advantages we have enjoyed. Over the past five to six years we have seen significant and fundamental changes in the labour market. Higher employment has been welcomed, and that has also been reflected in significantly lower unemployment statistics. However, companies have found it much more difficult to recruit and retain staff, and staff turnover has increased. Companies have higher training costs, because the early 1990s pool of skilled labour is no longer there. We have evidence that pay differentials with GB have declined. With the economic growth of recent years, driven mostly by the larger Northern Ireland companies, we have closed the pay gap. We have argued that Northern Ireland does not want to be seen as a low-pay, low-wage economy.
We also have the additional costs of attracting professional and technical staff to Northern Ireland. We have an image problem; we are a small part of the economy, and many companies - for example, pharmaceutical and technology companies and those in the food sector - pay a premium to attract staff.
There are two other areas in which we enjoyed an advantage. The gap in property costs has been closing over the past five to six years. We also have an increasing tax burden in Northern Ireland compared with our international competitors. I can point to things such as the climate change levy and the aggregates tax, which will soon be introduced, although a strong lobby is attempting to secure a one-year derogation for various products.
We have a high cost base. We see rating charges as another tax and believe that they must be assessed for their impact on competitiveness. Companies seek predictability in their future bills, and they need plenty of time to plan for any changes that may be introduced. We believe that any additional costs and taxes will undermine Northern Ireland's current competitiveness. That means lower profits and returns, which in turn will mean lower investment. The bottom line is that it will lead to a reduction in employment through loss of potential inward investment and existing jobs.
We believe the rationale for derating will weaken after 2010, largely because of the unwinding of the electricity contracts. However, we also stress that the existing high cost base in Northern Ireland must be reduced. We want Northern Ireland to be an attractive economic environment for indigenous companies, start-ups and international investment. In our competitive situation we are concerned about the Republic of Ireland's tax regime. One of our members said that we must be careful about any changes in this arena, because any change to the existing regime is likely to have unforeseen and harmful consequences.
Dr McMorris: I will ask Mr Ennis and Mr Dobbin to make some comments.
Mr Ennis: I would like to speak in multinational terms. I am a senior vice-president in an American corporation which bought over Boxmore a year or two ago. We have over 50 operations, primarily in Europe. In investment decisions we examine closely the cost base of competing companies in our operations. Quite often, some of them will compete in similar marketplaces. As Mr Smyth has highlighted, rates are a tax by another name and they increase a company's cost base. When the issue is examined in simple terms, it can be seen that it affects inward investors in two ways, influencing where they would set up additional businesses and in which existing businesses they would continue to invest.
We have recently decided to install increased capacity in the South because of the high Northern Ireland cost base. That has happened despite whatever loyalties I might have to fly the Northern Ireland flag within our remit in the American head office. Let us look at the practical cost figures. If we do not recognise that we have a highly uncompetitive cost base, the danger is that we could add to it, and that will costs jobs for Northern Ireland, which will mostly go to either Great Britain or the Republic. The relative cost base in those two areas in particular must be examined.
As Mr Smyth has indicated, if Northern Ireland electricity charges were brought down to a competitive remit with Great Britain by 2010, we could then say that the time is right to have rates reconsidered and brought into the picture. However, it would be detrimental to Northern Ireland as things stand.
Mr Dobbin: I would like to address the more specific concerns of the food industry, which is still one of the largest parts of the manufacturing sector despite the problems in the Province in the past year. Our business is run as a co-operative. It is owned by local farmers, it employs local people and is committed to the local economy. Our ethos is to try to develop our business on a local base where possible.
In order to survive, however, we have to export outside the EU. We also have to sell products into the home market, in which we are competing mainly against Southern Irish companies in Ireland and England, because Southern Ireland has a number of food manufacturers. In export markets we are competing against Southern Ireland, New Zealand and America. In both home markets and export markets we suffer considerable disadvantages, which are currently being hammered home because this year the dairy sector alone will lose approximately £100 million of income as a result of EU changes to take out export subsidies.
At present our Southern counterparts have a corporation tax of 10%. Energy costs less in Southern Ireland and Great Britain. Energy in Northern Ireland is 25% more expensive than Great Britain, and significantly more expensive than New Zealand and the United States. It is our second highest cost.
We also have problems getting products to market because of the poor transport infrastructure and fuel costs. Everyone in Northern Ireland is aware of high fuel costs in the United Kingdom. On their own, those costs might be surmountable, but collectively, when coupled with a strong sterling, we are literally fighting for our lives in export markets. Imported products from Southern Ireland and New Zealand are beginning to take more of the share of the shopping basket in the home market as world trade talks and agreements pull down the barriers to imports.
We employ 1,000 people directly; we provide full-time employment for approximately 5,000 people on farms; and a further 1,000 people are employed as milk roundsmen and in animal feeds and other packaging trades. Altogether we give direct and indirect employment to 7,000 people. At this stage we are struggling to maintain those jobs.
We are contemplating an investment in a new factory for added-value products to try to improve what we can offer to the customer. That factory might be located in the west of Scotland, Monaghan or north Antrim. At this stage the cost per annum to locate it in Northern Ireland is somewhere around £0·5 million more than it would cost to locate it in Southern Ireland or the west of Scotland. Both countries are offering grants that are similar or better than Invest Northern Ireland; both areas are offering lower energy costs; both areas have lower transport costs; and both areas now have a wage bill similar to our own. In fact, the wage bill in the west of Scotland is lower than that in Northern Ireland.
We are a co-operative, owned by local people, managed by local people and committed to the local economy. However, we are caught between two options. Do we survive in the market and move production out of Northern Ireland, or do we continue to be faithful to the local economy and manage the decline? In the long term, if we put extra rating into the industrial base in an abrupt manner, or in a manner that does not address other structural issues, there will definitely be a cost to jobs. In the current world economy climate, the required inward investment is not there to replace them as it might have been two or three years ago.
Dr McMorris: In conclusion, it would be wrong of me not to mention the textile industry. I was a member of a Northern Ireland Textiles and Apparel Association delegation that met the Committee around 18 months ago. Many issues in the food industry mentioned by Mr Dobbin also apply to the textile industry, which still employs more than 16,000 people in Northern Ireland. Many of those jobs are in areas where there is relatively less employment or where employment is more difficult.
In many cases the textile industry is struggling to survive and many companies are going through the transformations that are necessary to try to compete in the modern world. They do not need another bill falling on their doorsteps, because in many companies that will be the straw that breaks the camel's back. Some business will not survive in any case, but the industry is still substantial and it does not need another burden. I will now hand over for questions, and I hope that we have not been overly negative and depressing.
Mrs Courtney: I welcome your presentation. As someone from west of the Bann - in other words, beyond Glenshane - I can confirm that, as a consequence of the troubles, everything you have said about energy is quite right. We cannot be competitive because currently there is only one energy source. With regard to transportation, the roads into Derry are some of the worst in the North. Derry is in a border area and the euro has caught up with us already, even if it has not caught up elsewhere. I remain convinced that derating at this stage would be detrimental to the whole economy.
You stated that insurance costs are increasing. During the troubles, insurance was extremely high and I have recently discovered that it is difficult to insure a politician's office. Has the peace process helped you with insurance? If not, will it happen? The Confederation of British Industry made some positive statements at the time of the peace process and has been supportive of it. When it comes to insurance and the day-to-day running of businesses, has the peace process helped you in any practical way?
Mr Dobbin: I would like to answer that question because we have just renewed our group insurance. We have four manufacturing locations and 16 distribution depots in Northern Ireland, and our policy has risen by just under 60% this year. The total extra premium has increased by £300,000 to £400,000. I forgot to put that on my list of woes earlier - thank you for reminding me.
The insurers cited the events of 11 September as the reason, and they have taken a different view of consequential loss disaster. In Northern Ireland terms there is a loading, because of the risks of terrorism, and we probably rate slightly higher than the average European country. This is the situation we are facing and we hope that it will diminish in time. Insurers have had a bad shock as a consequence of 11 September. In my own case, the guesstimate for the rates bill is somewhere around £500,000. Taken together with increased insurance premiums, that is £800,000 in extra costs.
Last year our group made a profit of just over £2 million, and this year our energy costs have also risen. When the figures are added up, we will probably not make a profit this year, and that was before the full effects of 11 September hit us. Insurance problems will apply to the wider world scene, and the effect of the insurance premiums will be felt across the spectrum in GB and Southern Ireland.
Mr Smyth: Premiums for buildings insurance and business disruption insurance have gone up by significant amounts. That is happening across the UK and Europe. Employers' liability insurance has always been higher in Northern Ireland. There is a higher rate of claims here, despite accident figures being lower. That rebounds on the companies that have to pay for it.
Mrs Courtney: As a direct result of the events of 11 September, the St Angelo airport in Fermanagh closed, because the premiums went up so much. The premiums for the airport in Derry shot up by about £75,000.
Mr Wells: I wish to play devil's advocate. The Assembly has a very small rate base to draw upon to provide services. There are only 600,000 households, many of which are in TSN areas and qualify for rates rebates. We have no other form of fiscal independence; we cannot increase VAT or income tax. Therefore, the only way to bridge the gap between what we spend and what the Exchequer in London provides is rates.
I have been involved in derating; it was one of the few achievements of the old Assembly in the early 1980s. I remember that in December 1983 we danced out of this Building, having won that concession. However, industrial derating deprives the economy of £100 million per year, which could be put into services such as healthcare or education. Why should our industry not pay its debt, when its competitors in the rest of the UK do so?
Dr McMorris: The costs of operating here are now higher compared to those of our competitors in the rest of the UK or in the South. We pay a premium on energy, amongst other things. We can give the Committee facts and figures about that. We could pay industrial rates, but we are convinced that it would have a direct impact on employment. That choice must be made. We understand the Assembly's problem. Perhaps, in some areas, the domestic consumer is underpaying in comparison to their counterparts elsewhere, even taking into account the large number of households in TSN areas.
If and when we manage to unlock energy price, there would be much less of an argument for derating, provided that other things remain in line.
Mr Wells: You are assuming that, if you did pay rates, it would be entirely negative. What if the £100 million was hypothecated to provide better roads or transport, which would directly benefit industry? For example, Mrs Courtney mentioned the problem with roads west of the Bann.
The Minister of Finance and Personnel, Dr Farren, may accept your point, but say that the £100 million would be dedicated to benefiting industry. That may involve robbing Peter to pay Paul, because it would free up £100 million that could go into health or another service. Can it not be seen as an investment decision, rather than a tax?
Mr Dobbin: You talk as though industry, and the employment that it generates, does not pay high taxes already. We already pay considerable corporation tax, despite the lower level of profitability of Northern Ireland companies. The private sector generates about £500 million in corporation tax for the Exchequer. All our employees pay income tax. We pay national insurance; we pay tax on fuel at a higher rate than anywhere else in Europe and we pay more for vehicle licensing than anywhere else in Europe.
As a business, we are already facing one of the highest tax burdens in Europe. Many years ago, Southern Ireland took the bold step of reducing the level of corporation tax for manufacturing businesses to 10%. On face value, that reduced the income that the Government received from businesses. However, even despite its recent problems, the Southern Irish economy has seen a vast increase in the amount of money that businesses contribute to the Exchequer by creating an environment where businesses could prosper and employ more people who, in turn, pay tax.
All our employees pay income tax and rates on their homes. Every business pays National Insurance. We are already contributing. We have given our pound of flesh through excise duties on roads. We should be getting value for money on what we have already paid. You cannot take too much of the cake from one area. The economic cake must be made bigger. That will give the Government more money to put into infrastructure. We are also citizens - I want better hospitals, better schools and better roads. My children have educational needs. My parents are old age pensioners who must pay for healthcare and homes. We have the same needs, but if too much is taken from industry, the cake will get smaller until eventually there is nothing left.
Mr Smyth: We are extremely concerned about the infrastructure deficit. The view from business is that current spending and the efficiencies and effectiveness of public expenditure must first be put in order. I will give some examples. The Minister suggested that around £30 million per year could be saved through better procurement practices alone. Absenteeism in the public sector in Northern Ireland has been quoted in the Assembly at 6%. That is a cost of £145 million a year, if it applies to the entire public sector. What are we doing to save some of that money? Savings could be made on benchmarking and the use of e-commerce, and also through cutting excessive administration and management costs. Management costs in the Health Service are about 1% more than in Scotland. That is about £15 million per year.
There is a range of other areas where savings could be made to give additional investment to education, transport and health, for example. We should also be innovative in looking at underutilised resources in the public sector such as land and property to see where funds can be raised. That money could then be spent on areas that are of more benefit to business and the wider community in Northern Ireland.
Mr Ennis: I appreciate that Mr Wells is playing devil's advocate in teasing out some of the issues. Industry is quite a soft target in this situation. As Mr Smyth said, there are certainly plenty of savings to be made in the public sector that could contribute over £100 million to health or education. It is important to get that in order first. Business generates wealth and jobs in the community. It would be very short-sighted to take the easy way out and hit the business sector.
I do not know whether the Committee is aware of a document has just been published by the Milford Group, an independent group of businessmen, which suggests a very effective way of operating in the UK tax system that gives a competitive rate with either the Republic or GB. If tax revenue was increased by a rate increase, adopting the Milford Group's suggestion could offset that, and yet still give a balanced view. Whatever it is called, tax is about getting the balance right and not increasing the cost basis any further.
Mr Wells: Taking off my devil's advocate hat, my concern is that the £100 million would simply be deducted from the block grant anyway - there would be no additional money. That has always been the problem with EC funding. For example, if £400 million were given to agriculture, that figure would be deducted from what agriculture was originally going to receive anyway.
High electricity prices stem from the generation contracts that were signed at the time of privatisation. If that problem was cracked, and prices were brought down to the UK average, are you saying that you would be prepared to accept the rates burden?
Dr McMorris: Our argument for continuing derating is much weaker at that point. Providing that other factors have not increased the cost base in the meantime, we would be happier to accept rerating, because industry has always seen that as the trade off, even when talking to Government.
Mr Armstrong: I agree with what you have said, because Northern Ireland is an exporting country. In a stable situation, insurance companies will not charge as much, and the outside world will see that we have a more productive environment. How can we get those costs down?
Mr Ennis: That is a good question. One way to bring insurance costs down is to introduce a different legal system for processing insurance claims. The jury system and employers' liability insurance, which Mr Smyth referred to, are the reasons that those costs have not come down. Mrs Courtney made a good point. Why, when political stability has significantly increased in Northern Ireland, have insurance rates not reflected that? The way in which claims are processed through the courts system is the crux of the matter. The biggest fundamental change that the Assembly could make is to adopt the system used in Great Britain. A significant reduction in insurance costs would then be seen.
Mr Armstrong: None of your businesses are facing the same risks as they did over the past 30 years, so there should not be a high risk. Northern Ireland does not compare with the United States, 11 September notwithstanding. That event should be reflected here. It was the terrorist activity that left us with high insurance, whether it was vehicles or property.
Dr McMorris: The major area of non-competitiveness on which we are concentrating, and where we are out of line with our competitors in the rest of the United Kingdom, the Republic and Europe, is in relation to employers' liability insurance. It is a major cost. The cost of insuring for that, and the cost of reacting to claims for that, is where we are out of line. It is to do with the level of awards and the way in which they are processed through the system. Is that correct, Mr Smyth?
Mr Smyth: Yes, it is. We do not want to be a low-wage economy, but there are many additional costs as well as wages. Northern Ireland has proportionately many more claims as a result of industrial tribunals than Great Britain. We have additional administration costs due to legislation. Companies must have people on board to manage those costs.
I always understood that terrorist insurance was covered by the Compensation Agency, so that would not have any impact. The situation since 11 September applies to companies across Europe and the United States. We are on a level playing field in that respect. We were trying to draw attention to where Northern Ireland is particularly disadvantaged in that instance.
On the issue of competitiveness, there are problems with water costs and waste disposal costs. The policies and decisions made by the Executive have an impact on who will be charged what, what efficiencies are to be effected and who is driving the costs out of the system. In Great Britain, water and waste are now regulated industries, there have been major efficiency savings. Major investment was undertaken in the 1990s, which Northern Ireland has yet to face. It is worrying that there is not enough pressure on the organisations to drive costs out.
Mr Dobbin: Any elected representative will be concerned that driving the cost out of the public sector is a two-edged sword, because it provides much-needed employment. To be positive, there is a lot of talent in the public sector. There are many people with skills, knowledge and capabilities that are not available to the private sector. If we made our public sector more efficient, ultimately the redeployment of those people in the private sector would create wealth for everyone. It is a case of trying to find a way to do that with the least disruption. For instance, if rates had to be introduced, one would hope that they would not be introduced at 100% on day one. There is scope in our economy to try to get more wealth creation so that that money, to take Mr Wells's point, can come back through income tax and normal tax methods into the Assembly or central Government for redeployment into social services or other requirements.
Mr Wells: Our difficulty is that rate money comes directly into our Exchequer and into our pot of money. Any increase in Inland Revenue is snaffled up by the Chancellor, who takes it with great delight, and then we have to battle for it.
Mr Dobbin: I understand that you have the powers to put a levy of income tax on top.
Mr Wells: The Scottish Parliament has those powers, but unfortunately the Northern Ireland Assembly does not.
Mr Dobbin: If you had those powers, how would you feel about going to your electorate and saying that you want to increase the tax burden on them? You would probably be lynched, and you would not do it. However, you are happy to do it by stealth, or what could be considered by stealth on businesses.
Mr Wells: There is so little industrial investment in south Down that I would have no worries, but there would be big problems for other folk here such as Mrs Courtney.
Mr Dobbin: We have factories in Cookstown, Keady, Ballymena and Cullybackey. There is no industrial conurbation in Cullybackey or in Keady, so we are one of the few local employers in those areas. If rates were introduced, we would close the smaller factories and consolidate because it would become too expensive to have a multisited operation in Northern Ireland.
Rates will punish those outlying areas west of the Bann and north of Lough Neagh more than in Belfast. Those companies which export will be punished much more than those companies which are home-market-related because everyone in the home market will be paying the same rates. However, if one exports one has to compare the total tax burden with low cost areas in America, the Midwest, New Zealand or South America.
Mr Armstrong: Are you saying that rates should not be as high because Northern Ireland is an exporting country instead of an importing country?
Mr Dobbin: The total tax burden on our companies must be realistic and our total cost burden must be competitive with the people we have to beat, or match, in the market. If it is not competitive, we will not make the decision on whether we invest here or survive; it will be our customers who will walk away from us.
Dr McMorris: We need to remember that this is a country with a population of 1·8 million, and it is a small market. The vast majority of companies that manufacture in Northern Ireland have to survive by exporting, even if it is to the rest of the United Kingdom, which is still across a stretch of water. In each of those cases we are competing against companies which are more local to the market. The sterling is very high in Europe, and life is very tough. In GB there is deflation on an output basis. The multiples that I sell to do not expect to pay what they paid last year - they want to pay less. Likewise there is generally a downward pressure on prices with Mr Dobbin's food products. This is the background against which our companies are working, so the export situation is even more important.
Mr Armstrong: I agree that we must be competitive, and to be competitive we are fighting against high sterling and the euro. Our Government have to support us in some way. There is no point in strangling people who are trying to make the country a more profitable and better place in which to live.
Mr Smyth: I read in a Bank of Ireland briefing that currently one in four companies in Northern Ireland is unprofitable. If more costs are added, companies are made even more unprofitable and in many cases completely unviable, so more companies will just disappear.
Dr McDonnell: I am intrigued by Mr Smyth's second last point. The rationale for derating post-2010 is that energy charges at that stage are perceived to change.
I understand that industrial energy is bought on the open market. When we spoke to the great and the good, we were told that at the upper end of the energy market, 35% was deregulated for the most frequent users, and the majority of industrial users fall into that bracket.
Mr Dobbin: The bulk supply tariff (BST) that is part of the supply to large users is the same that is sold to consumers. Yesterday I renewed our electricity contracts, and prices have fallen this year because of the Moyle interconnector and a slight increase in the North/South interconnectors. However, when Southern Ireland and Scotland sell into Northern Ireland, they still do so at a higher rate because they know that there is not enough competition - our home generators that can more than cover our needs have locked us into those higher prices. The prices have come down for the large users who use between 6% and 10% of the electricity. Last year, prices rose by 17%, and at present overall electricity in Northern Ireland is about 25% more expensive than that sold by the equivalent UK company. I do not have the figures for Southern Ireland, but our electricity is a lot more expensive than theirs, and theirs is more expensive than in GB.
Dr McDonnell: That is important because for the past year the Committee has been trying to get to grips with the energy issue. The Committee will finalise its views today or tomorrow when every "i" is dotted and every "t" is crossed. The point you made on prices had not been made clear, because I understood that it was a free market. I had a conversation the other day with Harry McCracken from Northern Ireland Electricity (NIE) and he is keen for the market to open up. I am aware of the Moyle interconnector, and I am also aware that there is an artificial floatage on the market. The Committee is keen to correspond with you about energy because it needs to know more, and I would be glad to do that, either privately or with the Chairperson's permission. Energy cross-cuts industry, and it must be dealt with because everybody is being bled dry.
Dr McMorris: Could we deal with Dr McDonnell's question in more detail? We have one or two things to say that are significant.
Dr McDonnell: I would like some more detail from you.
Dr McMorris: We will do that, but we can give you some specifics.
Mr Smyth: From next year, most of the power that goes into the eligible market - that is the top 300 companies - will come from Scottish Power, so there will be no other competitors. There were newspaper reports this week that neither Belfast West Power Station nor Premier Power Ltd in Larne will compete. That means that there will be a reduction in prices of 6% to 10%. However, power prices in Northern Ireland will still be significantly higher than anywhere else in GB. There are two reasons for that: first, the cost of bringing power over the interconnector will be high, and secondly, there is no other competition in Northern Ireland. There is no other efficient generation. The power that goes to Premier Power Ltd through into BST will be about 23% higher than after 2012. There will be a lot of cost depreciation in the contract for that period, and after that it will no longer go out to contract. There will be significant downward pressure on energy prices in about 2010 or 2012.
Mr Ennis: I have two operations, one in England and one in Northern Ireland. The Lurgan operation went out for tender on the competitive market. Two companies gave us quotes, NIE and the Electricity Supply Board (ESB), neither of which could serve us adequately. The ESB could not give us enough energy to meet our needs, so NIE was our only supplier. We will have a 6% reduction when Scottish Power comes in. However, our energy costs rose by 20%. Twenty-three companies quoted for the Crewe operation. When Lurgan's bill rose by 20%, Crewe's bill went down by 5%. If I moved the Lurgan operation and based it in Crewe, it would save £500,000 a year.
Dr McMorris: One of the Blue Circle sister companies that is based in Cookstown can buy power at 2·9p in Scotland, but they pay over 4p here.
Mr Dobbin: I can give you another reason why our costs are dearer. In the presentations that we received five companies quoted for electricity supply - Scottish Power, the ESB, NIE and two other smaller companies. Only Scottish power companies service the Moyle interconnector. It has been set up in such a way that other English regional electricity companies are not allowed to supply power into it, even though they supply power to the grid. The result is a Moyle monopoly by one or two companies in Scotland. If that was broken, there could be cheap electricity through the Moyle interconnector.
There is a Southern connector that is not fully utilised, and 240 megawatts of power generation in Ballylumford that has been switched off by British Gas because it claims it cannot obtain economic gas. The same company is supplying economic gas directly into electricity generators in the UK. Something must be done to investigate why 240 megawatts cannot be used at Ballylumford, and why the Moyle interconnector has no competition.
Progress has been made, and money can be saved. Those involved should be congratulated. If we had low energy costs, Jim Wells and others would then be able to say rightly that costs had been improved. I am being deliberately facetious, but we would have less defence. What we are looking for is a total cost package that is competitive. It is not, to some extent, irrelevant where the money goes, but that is not as important as the total cost.
Dr McDonnell: I appreciate what you are saying in relation to energy costs. The Committee can work on that. The Assembly is business-friendly and is keen to see industry succeed. There is no point in reinventing businesses or allowing existing businesses to stagger or fall. The Assembly realises that but it has a dilemma. Every year, when efforts are made to expand the block grant for Northern Ireland by a few million pounds, the UK Exchequer says that our rates are too low and that the Assembly is, therefore, not collecting enough money either at domestic or industrial level. It does not see why it should give Northern Ireland money for roads and so forth if the Assembly does not collect it. Against that backdrop the pressure is on. Members are sympathetic to your case, not only at industrial level but also at the level of small businesses that lobbied against rates going up last year.
Nothing much can be done about insurance. However, something can be done about waste disposal. In relation to that the Committee was impressed during a recent visit to Denmark where many businesses and industries, like those that I presume you represent, operated combined heat and power plants. They were able to produce 90% energy from waste, which became either hot water or electricity. There is little of that in Northern Ireland. There is terrible waste regarding electricity consumption here. In some cases there is only a 30% recovery of energy.
Is there an opportunity to examine waste disposal? There will not be much recycling until some of the bigger industries that you represent take it by the scruff of the neck and start experimenting by setting up small company-based incinerators that will take care of waste disposal and produce hot water and electricity. The Committee was impressed with what it saw in Denmark, because some of those generators were supplying 200 homes. They were small, compact and efficient - as efficient as anything possible.
Mr Smyth: The Department of Economic Development carried out many studies in the mid-1990s. A key issue then was the lack of natural gas, which is an attractive fuel for combined heat and power. Now that we have natural gas, there is potential. There are new plans regarding waste and drafts will be published next week.
There is some uncertainty about waste. There are concerns regarding how the Department of the Environment has been developing its waste policies. There must be competition and a drive in all those areas with regard to cutting down costs. Going to one site will create a monopoly. Dargan Road is one of the most expensive monopolies in the United Kingdom and other sites are not being given the opportunity to compete. It is to be hoped that over the next six to nine months there will be more clarity with regard to waste strategy for Northern Ireland. At our council meeting last week a member who is involved in the environment said that key players, both indigenous and outside Northern Ireland, are examining facilities for recycling and waste management in Northern Ireland. I hope that in the next year or two there will be some movement in that area.
Mr Wells: I accept that everything you say is correct, and I am glad to have played devil's advocate because you brought out points over and above those contained in your presentation. This is a difficult circle to square, and our colleagues on the Finance and Personnel Committee are looking for new ways. Your strongest argument is that if the energy situation were sorted out, you would be prepared to look at rating again. That is a reasonable stance. You do not ask for favourable treatment, only for a playing field equal to that of your customers and rivals in the rest of the UK and in Europe. Were that situation to arise, would you look for a gradual introduction, say phased over a 10-year period?
Dr McMorris: If we have level playing fields on energy, our argument for maintaining total derating is removed, or certainly weakened. We would then suggest that were it to be introduced it should be phased in. Companies can adjust to things, given time. To go from nothing in one year to 100% in the next would not be desirable.
Other areas of uncompetitiveness must also be addressed. Dr McDonnell talked about waste disposal, and that area is an increasing problem for some companies. It may well be that we should pioneer recycling schemes.
In general, the answer is yes, but with qualifications.
Mr Smyth: Paragraph 18 of our paper highlights the fact that companies look for predictability. They would be very upset if, having recently invested, the Committee decided to introduce rates next year. An indication must be given that rates will be introduced after, say, four years. Companies will then make their own decisions as to whether Northern Ireland is an attractive investment environment. Companies must be given predictability and plenty of time to plan ahead.
At UK level, we are concerned about the impact of the climate change levy. Its real impact will only be seen five years down the line, and many decisions will not be made until then. Companies will not have reinvested and will move their operations. We must think the matter through very carefully.
Mr Ennis: With regard to Dr McDonnell's point about Treasury turnaround and rates, our obvious response would be that had the generating contracts not been made in the first place, there would not be a high cost base. We would not ask for derating, because our energy cost would be competitive. From an industrial standpoint, all we ask for is a level playing field. The Treasury created the unfair playing field, and were they to address that, we would be happy.
Dr McDonnell: We agree without reservation.
Mr Dobbin: Mark Ennis made a suggestion about the Milford Group. Were the Department to introduce rating but at the same time give us a lower tax burden elsewhere which would affect the cost while giving the Department the spending freedom it wanted, we would have no problem "swapping" the tax burden. For exporters, for instance, if there were relief on marketing costs or on product development costs as we ask, rates would make us no worse off. If I understand it correctly, what drives the Committee is that to some extent the rate money causes particular problems with the flow of funds to the Assembly. If that is so, the Committee could help us by changing the shape of the rate burden and keeping it neutral in respect of overall cost, thereby solving the problem of money perhaps going elsewhere in the Exchequer. We would have less concern and we could do it immediately. It is about trying to see if we can keep or cap the overall burden for companies. For example, if the Milford Group's requirements were met, that would reduce the tax burden, particularly for exporting companies.
Dr McMorris: More discussion on this would be required. One of the immediate things that comes to my mind is that the Milford Group's proposals circulate around tax credits. If there are companies that are not making much profit - and my particular sector has that problem - if the figures are examined, they cannot get the benefits. There are companies that are struggling to survive and are teetering on the edge; this could add to their problems. Typically textile companies have big premises. That is something that I would be concerned about. This is not something that we have totally rehearsed. It is something on which we would be prepared to join in discussion.
Mr Wells: I have a word of caution about the line that you are going down. There are companies in Kilkeel, such as the glassworks, which have vast expenditure on electricity. A reduction in electricity costs would have far more beneficial impact on those companies than any decision on rating. Are there companies that are low electricity users that would get clobbered by rating and not see the consequential benefit through lower electricity costs? You all seem to be representing industries with high-energy input.
Dr McMorris: The textile industry probably does not have the highest energy input, so we would be broadly neutral. It is a valid point. As a whole, we are saying that our argument is somewhat weakened, but it will affect companies differently.
Mr Armstrong: My understanding is that you are saying that you are quite willing to pay extra rates provided that the benefit comes to Northern Ireland and that you are not disadvantaged with the expenditure that goes elsewhere? The money that you pay for high electricity and insurance bills seems to go out of Northern Ireland, and therefore it is not going into the Northern Ireland economy. You will pay higher rates if you are still able to make a profit and be on a level playing field.
Dr McMorris: It is all about us being competitive and getting the level playing field. It is about our relative competitiveness; that is the message that we want to leave with the Committee. We must have competitiveness for our companies if we are going to develop employment and grow. If we are not competitive as a location, we will not get the inward investment, and we will not win the investment decisions. You have heard of two today - one that has definitely gone against us and one that has the potential to go against us as a Province. That is the crux of the matter. If energy costs were to come down, that would be one of the major areas of non-competitiveness removed.
Mr Clyde: You mentioned aggregates tax. How damaging would the aggregates tax be to industry in Northern Ireland?
Mr Smyth: That issue focuses on the 1,800 people involved in the aggregates industry. We can forward a short briefing to the Committee if members are interested. It has impacted particularly on the border areas and on companies from the border areas involved in added-value products. In the pre-Budget report in November, Committee members will be aware that we have had a one-year derogation on aggregates tax. One year is insufficient; indeed, a five-year phasing is insufficient. We would like to see it brought in over 10 years or wait until the Republic of Ireland does so. Consultants in the Republic of Ireland have recommended aggregates tax, although the Government are currently not minded to introduce it.
It would add cost to public expenditure. I saw some figures that indicate that in relation to new road building, hospitals and the use of aggregates, it will add about £10 million. That will be £10 million less to spend on other things. It will undermine the competitiveness of companies providing added-value products whether they be concrete, brick manufacturing or concrete brick manufacturing. Job losses will run into hundreds and potentially more.
Dr McMorris: Bearing in mind what is currently happening with fuel, it is also another opportunity for people to make money by running things backwards and forwards across the border in various ways. If we cannot stop tanker loads of petrol, how will we stop the odd load of gravel and so forth?
The Chairperson: Could you get copies of the Milford Group report for the Committee?
Mr Ennis: Certainly.
The Chairperson: You made a point on the ESB tendering. Was it unable to tender because it did not have enough capacity? Was it anything to do with the interconnector?
Mr Ennis: No, they did not have the capacity.
The Chairperson: Will Coolkeeragh coming on in a few years' time hold out any hope of reduced prices?
Mr Smyth: Very much so. That will be our first real competition. There will be competition from Scottish Power and we will then know the benchmark prices. What incentive will there be for Coolkeeragh to bring its power much lower? If it is 2·9p coming in from the interconnector, it will price it at 2·8p. One additional generator will not be enough, but it will certainly bring downward pressure.
The North/South interconnector has a 300-megawatt capacity, and my understanding is that at the moment we are limited to bringing 70 megawatts from the South to the North. That may not be a key issue this year because of generating constraints. However, when the new combined cycle gas turbine plant comes on stream next year, there will be potential for a downward pressure on prices in Northern Ireland. It will be important to ensure that the 70 megawatts are increased. There are technical constraints north of Dublin with the transmission system. We keep talking about the 300 megawatts, but we are limited in what we can bring in from the Republic to Northern Ireland.
Dr McMorris: I would like to make a small point in case I was misunderstood earlier. Blue Circle was aware that a sister company could buy power at 2·9p in Scotland. It was not being offered it from Scotland at 2·9p here - far from it. That was the point we were making about the open market: much lower prices are available on the mainland.
The Chairperson: Thank you. The Committee may need to correspond with you and tease out of some issues. Our current focus is on the energy inquiry. We thought we would cover it in six weeks and almost a year later we are still at it.
MINUTES OF EVIDENCE
Tuesday 25 June 2002
Mr P Doherty (Chairperson)
Mr Neeson (Deputy Chairperson)
Mr S Pearson ) Rating Policy Branch, Department
Mr B McClure ) of Finance and Personnel
The Chairperson: Good morning, Gentlemen. I welcome Mr Brian McClure and Mr Stephen Pearson from the Rating Policy Branch of the Department of Finance and Personnel. After your presentation, Committee members will ask you questions.
Mr McClure: I am head of the Rating Policy Branch in the Department of Finance and Personnel's central finance group. Stephen Pearson is principal economist in the Rating Policy Branch. Thank you for this opportunity to give an overview of the review of rating policy and to speak about industrial derating. This is regarded as the start of the consultation. We are happy to return to the Committee at any point during the consultation.
Twelve key issues have been identified in the consultation paper. All Ministers have had the opportunity to contribute to the paper, which was prepared by an interdepartmental steering group. The key issue that we are concerned with this morning is industrial derating, although we shall be happy to discuss any other matters on which the Committee wishes information.
Among the other 11 issues are domestic re-evaluation and the funding of the Water Service; small business relief and hardship relief may be more directly concerned with industrial derating.
However, the main issue this morning is whether the removal of industrial derating should be considered; before I speak about that, there are some points to note about the wider review. The Executive initiated the review in 2000 after the outcry about the increases in the regional rate. I hope that it will be completed in the autumn; it is difficult to be precise about when in the autumn, because we do not know what sort of response to expect from the public. The response will determine when the review will be completed.
We are having a review because Ministers considered the system to be out of date; it does not meet present needs and is not as fair as it could be. The public consultation began on 27 May with the Minister's statement, and I gave evidence to the Committee for Regional Development on 29 May.
Public consultation events took place on 11, 12 and 13 June in Enniskillen, Londonderry and Belfast. Attendance was disappointing, as only a handful of people turned up for each. However, the web site has had 9,000 visits since 27 May; 2,500 of which have downloaded the document. The events kicked off the process. Opportunities will be afforded to interest groups and organisations to present their views.
Although 16 September is the closing date for responses, the Minister is aware of the timetable for Committees and district councils - more time will be afforded to them.
The question is asked when change will occur. The decision-making process will commence after the autumn when the responses from the public consultation are known. At that time, impact analysis will be carried out and the Executive will have recommendations and options. Legislation will have to be approved by the Assembly during 2003-04 and beyond.
Industrial derating is the major relief in the Northern Ireland rating system, and its costs are £64 million rate revenue foregone. If the industrial sector was fully rated and the same amount of revenue raised from the rates, a regional rate reduction of 16% would result in the non-domestic sector; this would reduce rate bills by about 8%. There are two ways of looking at it: either £64 million is foregone or everybody would pay a little less.
Winston Churchill introduced industrial derating into the United Kingdom in 1929 when he was Minister of Production. However, it is now unique to Northern Ireland; no other jurisdiction offers relief on local property taxes to the industrial sector. It applies to all businesses that produce or alter an article by manual labour. The legislation for this is based on the Rates (Regional Rates) Order (Northern Ireland) 1997 and the Factories Act (Northern Ireland) 1965. Any premises where an article is manufactured by manual labour, except for premises predominately used for retail or storage would, prima facie, be entitled to industrial derating.
Among the premises entitled to industrial derating are Quick Copy in Bedford Street, Belfast. Its premises have a net rateable value of nearly £22,000, and the rates bill would be about half that. The Newtownards Chronicle is also entitled to industrial derating. The cases quoted have been brought before the Lands Tribunal, which decides these matters. Another example is R K Trucks of Carryduff.
A striking example is Granville Cold Storage in Dungannon. Its premises are used for European Union intervention storage, which was deemed to be the altering of an article by the storage of meat on the premises. It may not usually be associated with manufacturing, but the courts decided that it is entitled to industrial derating.
Dr McDonnell: What was altered?
Mr McClure: The court decided that molecular alteration to the meat rendered it suitable for sale. It was rather a strange decision; nevertheless, it must be followed.
The interdepartmental steering group handling this review commissioned a firm of consultants to carry out a study of industrial derating on Sliderobes (NI) Ltd. The steering group comprised the Department of Finance and Personnel, the Department of the Environment, the Department for Regional Development, the Department for Social Development, the Department of Enterprise, Trade and Investment and the Economic Policy Unit. The terms of reference were drawn up by a sub-group, the chairperson of which was from the Department of Enterprise, Trade and Investment, with the involvement of the Department of Finance and Personnel and the Economic Policy Unit. As a result, DTZ Pieda Consulting, a firm of economic consultants, was selected and the study was signed off in March 2002. The Committee Clerk has been provided with a copy of the DTZ Pieda Consulting report.
The study was to consider the effectiveness and continuing relevance of derating as a tool to assist international competitiveness. That was the original aim of industrial derating in 1929. A cross-section of derated companies was interviewed, and representative groups such as the Confederation of British Industry and the Institute of Directors were consulted. Comparisons were drawn with elsewhere.
The study found that the rationale for derating is questionable. The economic impact evidence suggests that rates would raise costs by an average of less than 0·5% of turnover. However, the study found that derating may be important to small firms; a disproportionate amount of their outgoings is spent on rates.
The conclusion was that removing derating would have little long-term impact, and the consultants recommended that there was a case for phased removal.
The DTZ Pieda report informs the debate on the issue; the Confederation of British Industry, however, has a different view. Derating partially compensates for extra costs on electricity and transport and the general costs that fall to Northern Ireland because of its peripheral location. The other opinion is that it is a powerful incentive for inward investment and a good counterbalance to the attractive fiscal regime of the South of Ireland, particularly in corporation tax.
Others believe that there is considerable dead weight in blanket derating. "Dead weight" is an economist's expression, meaning that it benefits many people who do not need benefit. For example, if derating is given, the benefit passes to landlords who simply seek more rent. However, not all premises are rented; there is considerable owner-occupation in the industrial sector in Northern Ireland. Nevertheless, it is a consideration.
Finally, if the additional electricity costs faced by Northern Ireland industry are an impediment to economic prosperity, there is an argument that electricity should be subsidised instead of doing that through the tax base.
A strong view was expressed that industrial derating is important to sustain employment. One questioner who read the report felt that 0·4% of turnover, which was identified as an average effect on a firm, is a significant amount. A representative of the software industry asked why it had not been consulted for the study. The software industry is not generally entitled to industrial derating because of the stipulation about the use of manual labour in a process. A view was expressed that it should be extended to other important sectors such as the hospitality and tourism industries. A contrary, and perhaps extreme view, was that the agriculture industry should be rated. Another questioner asked whether domestic ratepayers should, in effect, be subsidising business.
It is clear that derating is important to some firms and attracts inward investment. The key question is: how significant and important is that? Many in the industrial sector did not recognise this subsidy. It was interesting that only a small percentage of those who were surveyed in the study knew their rate liability.
The review rules nothing in or out, except for agricultural rating and domestic water metering. Responses from the consultation and the impact analysis will feed into the process before decisions are contemplated. Any change will be phased in gradually, and transitional arrangements will be put in place to protect vulnerable groups and those facing hardship.
The reinvestment and reform initiative is important, but fairness was the driving force behind the rating review. However, the reinvestment and reform initiative adds focus to the rating review.
Mr Wells: We have heard the views of the Confederation of British Industry. I may be the only member of the Committee old enough to remember the introduction of industrial derating in 1982, which was one of the few achievements of the old Assembly. I remember clearly everyone dancing in the aisles in 1982 when we achieved that concession from the Department.
It was introduced because Northern Ireland was uncompetitive, particularly in energy prices, and also because it was on the periphery, although that has become less important. However, there was a gap between the energy prices endured by our companies and the next lowest region of the United Kingdom. The Confederation of British Industry said that when energy prices, which are a mixture of distribution and generation costs, are tackled it would accept industrial derating. We are all working towards that goal, but we are nowhere near it. Would it not be unfair to inflict industrial derating on our big employers until there is a level playing field with the rest of the United Kingdom and with the Republic?
Mr McClure: Until 1982, 75% derating was applied; in 1983, that was extended to 100%. There is an argument that the service sector suffers as much as the energy sector through costs. I am aware of the evidence given by the confederation, and we have met it to discuss the additional costs. That is tied up with the 10-year electricity supply contracts. The Confederation of British Industry view is that once the contracts come to an end, there is a case for phased removal.
Mr Wells: Is that not a reasonable stance?
Mr McClure: Is there not a better method? Another view is to subsidise electricity rather than use the local tax base to compensate. The service sector as well as manufacturing faces disproportionately high electricity costs.
Mr Wells: Let us assume that it is only 0·4% - £61 million. That is £61 million from the bottom line. Including the rates and levying the charge at £61 million is net additional cost, which will simply transfer to the profit figures. That is significant. Companies get nothing for the £61 million; it is money down the drain. Bombardier Shorts will pay £1 million to get its bins emptied and the streets swept, but they will not be swept any better because the company is paying an extra £1 million a year. There is no benefit to the companies; it is purely tax. That will translate through the balance sheets as a loss or a smaller profit.
Mr McClure: According to the DTZ Pieda Consulting report, the cost will not be significant for most firms.
Mr Pearson: Presumably it would hit the smaller firms harder.
Mr Wells: It is a tax of £425 a job. If you add up all the employers who will be affected and divide that by £61 million, it works out at £425 a job. Some companies will decide not to extend their recruitment or will lay off staff because of that significant burden, particularly companies with a small staff and a high rate liability. That is the average. Companies could have to pay £1,000. I am playing devil's advocate. It could come on top of a 1% increase on National Insurance contributions up to the highest salary, fuel duty and other expenses. Businesses would ask whether that was fair.
Mr McClure: Fairness between the manufacturing sector and other sectors is an issue. Even in the manufacturing sector, the software industry is not entitled to rating relief.
Mr Wells: Not unless they put their computers into cold storage.
Mr McClure: That seems to be the trick.
Mr Pearson: It is telling that only 7% of the firms surveyed said that industrial derating was of any significance to them. A representative sample does not seem to think it important to business.
Mr Wells: However, all their umbrella bodies are vociferous about it. Mr Neeson and I gave a presentation at the Federation of Small Businesses conference. The federation was clearly concerned, as are the Confederation of British Industry and major employers such as Bombardier Shorts. Bombardier Shorts considers this a major issue - £1 million in one fell swoop. There is always difficulty in border areas. They do not have to be in Northern Ireland; they can hop across the border and set up in the Republic.
Mr McClure: I accept your point, but derating is a blunt instrument. Some of the businesses I cited are not competing internationally. That is also an issue. They are local businesses competing with other local businesses. The fiscal regime in the South is attractive to industry. Derating is such a blunt instrument that it applies to many businesses that are not inward investment businesses.
Many businesses that benefit from derating are not inward investment businesses; small business relief may help them, as it would apply to all sectors and not just to manufacturing. Small business relief could be available to all service sectors including manufacturing and software. There are proposals to introduce that in Great Britain in the future.
Mr Armstrong: What was your objective for derating and why could it not stay as it was? Was it to encourage more revenue into Northern Ireland or was there another reason?
Mr Pearson: There are several aspects to derating. It has been in place since 1929 and it is now out of date. At the time, it was applied to assist with international competitiveness when most of the industrial base was the production of widgets. We have moved on in 75 years, and the economy is now much more diverse. Many argue that it is not adequate for present needs.
Mr Armstrong: Some companies are derated to make them more competitive in the export market. We must compete with the rest of the world; therefore we must have an incentive to make exporters more competitive. If revenue is needed it should come from some other source.
Mr Pearson: That is a valid point, and the question is still open. However, derating may not be the most effective way of achieving that because of the range of properties it applies to. It excludes certain sectors and includes other that may not fit the criterion and are not export companies.
Mr Armstrong: Should companies that export still have that facility, and should those that supply the home market be fully rated?
Mr Pearson: We are interested in such a response, and if the consultation finds opinions strongly in favour of that approach, it will be reported to the Executive.
Mr Armstrong: We need an incentive in Northern Ireland to export our many products. If extra revenue is needed for hospitals or roads, it should come from another tax. Although we do not have the remit, I would be in favour of a 1% increase on tax. That would solve many problems, including derating.
Mr Pearson: There is also a European Union dimension in terms of providing assistance to industry. State aid could be used to help Northern Ireland with its exports.
Mr McClure: Industrial derating is registered as state aid.
Ms Morrice: Is it legal under European Union law?
Mr Pearson: Industrial derating is legal and registered as state aid; it is subject to annual review. There was an opinion in favour of local income tax on each day of the consultation. Local income tax is not covered in the consultation paper; however, if there is a strong opinion in favour of it, it will be reported to the Executive.
Mr Armstrong: Not every rated company is a profitable company. Income tax will only take tax off profit. The companies that are not doing well will not pay tax. I do not mean a Northern Ireland income tax; it should be a Westminster tax, but we have no say over that.
Mr McClure: There are much wider issues associated with that.
Mr Neeson: The Assembly should have tax-varying powers, and the Committee endorsed that view in its response to 'Strategy 2010'. It is sad that that is not considered in the review. DTZ Pieda Consulting has underestimated the strength of feeling among companies about the derating proposal. Is there a time scale for the gradual phasing-in?
Mr McClure: No. DTZ Pieda Consulting identifies a two-year period in the report. That is very sudden. I am not sure whether it would be possible to avoid hardship while introducing a measure over two years. However, that is the consultants' recommendation.
Mr McClarty: What size was the sample survey of companies?
Mr Pearson: One hundred companies were surveyed, which represents about 2·5% of the derated manufacturing sector.
Mr McClarty: Does that mean that the vast majority of them said that there would be no incentive?
Mr Pearson: Seven per cent felt that there was no significant incentive in industrial derating.
Mr McClarty: Seven per cent of the 100 companies surveyed?
Mr Pearson: Yes, 7% of the sample.
Mr McClarty: Therefore 93% felt that there was?
Mr Pearson: The remainder either did not know or said that it would have no effect.
Ms Morrice: How does it compare with the corporate tax relief in the South?
Mr McClure: There is no comparison. No in-depth analysis of the two regimes was carried out. The derating that applies here would still not match the package available in the South.
Ms Morrice: Should that not be taken into account in the review? Has research been done to compare state aid to industry north and south of the border to create a level playing field?
Mr McClure: That must be completed before a final decision can be made. However, DTZ Pieda Consulting found that derating seemed to be of most importance to locally based firms that compete with one another rather to than those that compete in an international market place or those that could be classified as inward investment cases. DTZ Pieda Consulting did not find that to be an important location factor to those firms that settled in Northern Ireland. A full study of the economic impact would be required before change happened.
Ms Morrice: On the island of Ireland, I think.
Mr McClure: Yes.
The Chairperson: What is the monetary value of the policy to industry?
Mr McClure: Sixy-four million pounds.
The Chairperson: Thank you for your evidence. Will you be available if we have further questions for you?
Mr McClure: Yes, of course.
MINUTES OF EVIDENCE
Tuesday 3 September 2002
Mr Neeson (Deputy Chairperson)
Mr Tom Gillen ) Irish Congress of Trade Unions
Mr Jim McCusker )
The Deputy Chairperson: Welcome, Mr Gillen and Mr McCusker, from the Northern Ireland committee of the Irish Congress of Trade Unions. Please make a short presentation before we ask questions.
Mr Gillen: Thank you. We are pleased to be here. I will speak briefly on the short paper that I submitted on behalf of the Northern Ireland committee several weeks ago, and Mr McCusker will cover some of the details.
Equity in the rating process is a horizontal principle throughout the Programme for Government, and there are some inequities in the present system, especially when domestic rates are compared with industrial and commercial ones. We will be highlighting them in our response to the broad review of rating policy.
With regard to industrial derating, we note the DTZ Pieda report and the figure of £64·3 million. That study concluded that derating is not a cost-effective tool of economic development, a pretty harsh statement that needs to be addressed during the overall process. The ICTU sympathises with employers who are in a difficult situation, and Mr McCusker will elaborate on that. Hired transport and fuel costs also affect our competitiveness.
The review continues, but we are not convinced that there is total justification for industrial derating to continue in its present form. There could be better targeting, and that will emerge through discussion and debate. I rest my argument there. My colleague wants to discuss further details, and we also want to answer the Committee's questions.
Mr McCusker: I want to make three points. The first relates to the deficit in funding for infrastructure - which means that we must critically examine possible sources of revenue. With regard to the rating review, two main sources of lost revenue are industrial derating and vacant property, which account for around £100 million per annum. That could support the borrowing of £1·4 billion, which would make up a sizeable part of the deficit of £6 billion for funding public capital projects. I agree that a good case for continuing exemption is needed, especially as domestic rates are being increased at a higher rate than rates for non-exempt business.
The second point is that industrial derating is equivalent to a subsidy, and in return for a subsidy, there must be economic benefit. Most of the £60 million subsidy goes to companies that are not apparently making any additional contribution to economic development. However, as Mr Gillen said, if any company can show that there is clear economic benefit, the trade union movement will reconsider the question of industrial derating.
The third point is that one of the main aims of the Department is to promote knowledge-based economy, and I understand that the Committee shares that aim. However, industrial derating discriminates against a knowledge-based economy because a company needs to be engaged in an activity that involves manual labour before it qualifies for industrial derating, and a knowledge-based economy or industry does not normally involve manual labour. The view of the ICTU is that industrial derating appears to run contrary to the economic development policy articulated by the Department and supported by the Committee.
We discussed those issues over a year with the Confederation of British Industry (CBI) and said that if the CBI could make a convincing case, we would reconsider the matter. We have yet to hear anything that convinces us to support the present form of industrial derating.
Mr Wells: I am surprised that you did not deal with the other so-called benefit of industrial derating. Northern Ireland competes for inward investment with businesses throughout the world. It often competes with the Irish Republic, which offers an attractive package for inward investment. One of the cards that was used by the old Industrial Development Board (IDB), now Invest Northern Ireland (INI), was to say to potential manufacturers that there would be no local tax or rating on the manufacturing process as there is in other parts of the world. Do you not consider that to be an attraction that would justify the retention of derating?
Mr McCusker: The DTZ report examined that and concluded that it does not seem to be an incentive for foreign investment. We see little evidence that it is a big attraction to industry. The DTZ report shows that the proportion of costs imposed, particularly on larger industries, is so small that it is unlikely to be a motivating factor when a company is deciding where to locate its mobile investment.
Mr Wells: If we were to abolish derating, how do you suggest it should be done? For some companies it would be a big hit very quickly. For instance, Shorts would pay an extra £1 million a year immediately, because it occupies a great deal of space. Should it be phased?
Mr McCusker: Yes. It should be phased, but while the cost to big companies may appear large, in overall terms it does not seem very big. Another point which may need special consideration is that for very small businesses, as the DTZ report shows, the amount may be a greater proportion of their costs so should assistance to them to ease that burden come from some relief in the rates system or from one of Invest Northern Ireland's schemes? The point is made somewhere in the DTZ report that it is not ideal to target assistance using the rating system - it might be better to target it through the assistance which is available from Invest Northern Ireland. Whether there should be any special scheme for an interim period for small businesses is a point which must be considered.
Mr Wells: One of the main reasons that industrial derating was brought in was the great disparity between energy costs here and in the rest of the UK and, indeed, the Irish Republic. Is there any justification for going down this road until we have tackled that problem? Surely, the CBI's view is that eventually this is going to happen, but that it can only happen when there is a level playing field with energy. Surely, that is better than going for the immediate abolition of derating.
Mr McCusker: Energy costs for everybody are higher in Northern Ireland, and domestic ratepayers could make the same point. In fact, they could say that domestic ratepayers have little choice about paying the electricity charges imposed on them. Larger companies have a choice, and some can get electricity at a lower rate than domestic ratepayers. It is a question of equity between domestic and non-domestic.
If there is a case for subsidising business energy costs, it is best done through a separate scheme and not by way of the rating system. That has been done in the past with subsidies paid by the Department to ameliorate the cost of electricity for everybody in Northern Ireland.
Ms Courtney: When the CBI came in I did not consider it as that. Mr McCusker gave the amount lost through the derating of vacant property, and I think he said that £8 billion could be gained for infrastructure. Coming from Derry where new development has virtually stopped - there has been a moratorium since the start of April until money is available to get it up to EU Directive standards - makes me think that there is something to be said for this Bill. If that amount of money could be raised, and I am not saying that it should not be phased in, there is a big argument for stopping industrial derating.
The Chairperson: That is more a comment, Ms Courtney.
Ms Courtney: It is to do with the amount of money - we are talking about £18 million just to upgrade the sewerage system at Culmore. The money is not forthcoming at the minute - it may be at some time - but at the minute there is a moratorium on all development in our area. There are about 5,000 construction jobs under threat, and some already have gone. So, given the figure that Mr McCusker gave, there is a strong argument against the CBI argument.
Mr Armstrong: I am opposed to increasing the rates because it would be the thin edge of the wedge for other rates increases. There has to be an incentive for our exporters. We cannot charge a levy on companies that import products here because it is against EC rules, so why should we impose a tax on our exporters? An increase in rates would be ongoing. Once started, it would be a way of creating income, but it would be taxing companies and people who might not be just so profitable. The Government should rethink this.
Unfortunately we do not have the power to raise income tax, but it would be more sensible to have a 1p increase in income tax across the United Kingdom to alleviate this problem rather than to impose a tax burden on Northern Ireland people. If we are to have tax raising powers in Northern Ireland, it should be for special commodities such as chewing gum. Items that cost our country money should be taxed, not people in an unprofitable situation. We should only tax people in profitable situations. This is why I oppose an increase in rates.
Mr Gillen: In the past we have said that we do not see a justification for this full £60 million. Domestic ratepayers are also suffering. The DTZ report shows that there would be little impact on the manufacturing and industrial sectors if they were to pay the increased rate, which, when spread across the board, will probably not be that much. We are not totally against it, but there needs to be a phased review. We are sympathetic to the needs of smaller enterprises, on which this may impact on more.
From this report and from discussions with other parts of the community and business, I know that there is a strong view that industrial derating is not producing the benefits that it could. Clear evidence suggests that if we tax vacant property we could lever £1·4 billion. A current deficit of £13·8 million has been highlighted by the Executive, which can fund £7 million; so another £6·8 million is required. If we are interested in the overall public good, which has been mentioned, there should be some kind of change in the industrial derating pattern, which would generate more than is being generated at present. A review of this, with some reduction and phasing, would create that benefit, lead to more employment and ease the burden on the domestic ratepayers. It would also make us more competitive.
Mr Armstrong: Demonstrating the thin edge of the wedge are the 100 jobs lost in Dungannon yesterday. That small amount of money could help keep companies alive. Think, for example, of the rates increase that companies such as United Dairy Farmers or Bombardier would have to pay.
Mr Gillen: I am not sure of the exact figure that Bombardier has to pay, but the evidence is that if this is spread over the entire enterprise it will not damage its competitiveness in manufacturing. The loss of more jobs in Desmonds obviously concerns us. Of course, the entire textile industry has been suffering for some time now, and it is not industrial derating that has caused that - it is world pressures. Interestingly, Desmonds said that staffing was an issue.
Obviously it is for the Department for Employment and Learning to see that proper training and facilities are provided. It could be something to do with the modern plant. We do not welcome that, but industrial derating was not a factor in the Desmond's announcement.
Mr Armstrong: I agree, but a company is in a more profitable situation if it does not have that extra bill to pay. Anything that starts tends to snowball because it is a handy way of getting revenue. That is why I am opposed to it.
Ms Morrice: I am very interested in this. I have a couple of observations and a couple of questions. One of the problems here seems to be the need for more money for other things, particularly infrastructure. A case that I, and others, have often put to the Assembly is that road accidents cost the economy £400 million a year. That includes the cost of hospitals, police and ambulances and the effects of the loss of jobs and working time. The Public Accounts Committee came up with that figure. Why are we not thinking out of the box? If we put much more money into road safety, we could make savings. Rather than cut benefits that are given to industry, let us use other ways to find this money.
That is my first observation. The second is to do with manufacturing industry. I am well known for my defence of textiles, shipbuilding and food processing. Northern Ireland needs to keep a handle on value-added work in these areas to compete with developing countries in the Far East. These industries employ people. Mr Armstrong is right. We have just heard about what is happening to the textile sector. These industries need help rather than have their benefits cut. We do not want to hit industry. I am very interested in the view of the trade union movement on this. Are there not other ways of raising money, such as toll roads? Can we not look at them? How many jobs could be lost with the removal of industrial derating?
Mr McCusker: On the first point, to finance the infrastructure deficit we need to look at all possible sources of revenue. Road accidents are one; this is another. The deficit in funding for capital projects is such that we have to look at everything critically, and when we look critically at industrial derating, we wonder what economic return we are getting for that subsidy. The CBI has failed to persuade us that we are getting a reasonable economic return for the £60 million that is being invested. The DTZ report did a detailed economic analysis of the impact on industry in great detail and did not find that it was likely to have any great employment consequences.
Ms Morrice: Can you be convinced of that?
Mr McCusker: Rating is a small proportion of costs, particularly for larger businesses. Rises in wage costs are much more significant.
Ms Morrice: Could they not use it as an excuse?
Mr McCusker: Companies use all sorts of excuses. Whether they are valid is always debatable. We fail to be convinced that this is the best use of that £60 million of public money. The CBI has supported the proposals of the Milford Group, which suggest that there should be tax relief for expenditure on certain areas, such as research and development and training. They do not suggest that it should be given across the board.
Ms Morrice: And that it be targeted?
Mr McCusker: Yes. This is totally untargeted. Mr Armstrong talked about exports: many companies take the subsidy and give nothing in return, and that is the greatest problem with it.
Ms Morrice: Are you saying that by removing industrial derating the subsidy could then be given only to companies that export, research or innovate?
Mr McCusker: There is a case for giving public funds to companies that lead the way in research and development or to those with higher than average exports. Such schemes should be coming from Invest Northern Ireland: we should not be trying to modify the rating system to provide such benefits.
Mr Gillen: This goes back to innovation, which Mr McCusker mentioned earlier. Innovation is a main plank in the Department of Enterprise, Trade and Investment's corporate plan, which has been supported by the BEST Report. That report has been seized by the universities and Invest Northern Ireland and has been greatly praised by the Department itself. We will be lobbying on the universities' behalf for an increase in research funding, and the money that the £60 million can lever out will produce better results in the longer term without inflicting serious injuries on the manufacturing sector. If some sectors in Northern Ireland are in decline, we must build up other areas where we feel we can compete more effectively.
Ms Morrice: I do not subscribe to that school of thought. I do not believe that our reputation for textiles, food produce or even shipbuilding has gone. There are ways of diversifying, and those areas should not be allowed to decline. When the dot com age goes - and it is going already - what will we be left with? People will always need clothes regardless of where they are made. If it is more expensive to produce clothing here, we should be dealing with that.
Mr Gillen: I did not intend to give the impression that I welcomed a decline in any of those sectors. We know that just manufacturing textiles is no longer enough - producing things that people want is key. The agri-food industry is of major importance, and it needs to be developed with high value-added products. Processing is extremely important - the primary slaughter of animals is not sufficient, we need to develop in other ways. This ever-so-slight change with £60 million to generate hundreds of millions of pounds, together with the other issues that Mr McCusker referred to, are very important. This is an overall examination, and the £13·8 billion must be found to improve our quality of life and make us more competitive.
Mr McMenamin: You talked about a more targeted approach to relief to assist parts of industry. I presume that the textile industry would be included. Calling for a levy on foreign textiles might be a start. I favour business parks and cross-border tax-free zones as ways of attracting inward investors: they might entice companies here. You mentioned research and development. How much do the companies that are not paying rates put into research and development?
Mr McCusker: I am not aware of any figure. I do not think the DTZ report went into that type of detail. It begs the question: what is the best way to assist companies that are to the fore in research and development? Again, we return to the point that the present system of industrial derating applies to every company, whether it is engaged in any form of research and development or not. That is one of the subsidy's deficiencies.
We experimented with industrial parks and enterprise zones in the 1980s. Various concessions were given on rates and other levies. However, experience and research show that they did not work. We would like to see penalties on imports of textiles, but that is totally off the agenda as a result of EC competition rules. What concerns trade unionists is the World Trade Agreement 1994 because that concentrates on some of the inputs into costs without addressing labour costs or labour standards. The international trade union movement has been arguing for some time that what it wants is a level playing field so that Desmond's in Northern Ireland can compete with the company's factories in Morocco and elsewhere. The way in which people are exploited in the developing world by some textile conglomerates is, from a human point of view, unreasonable. Even from a competition perspective, it is unfair.
Mrs Courtney: Mr Armstrong mentioned the closure of Desmond's in Dungannon, with the loss of around 103 jobs. If any area in the textile industry is suffering it is the north-west. Mr Wells said earlier that rates are not paid on vacant property here. Should another company take over a vacant factory, is it exempt from paying rates?
Mr McCusker: Yes.
Mrs Courtney: Would that be an incentive for firms to close instead of trying to preserve jobs?
Mr McCusker: That is another aspect of the debate on the rating review, but that also applies to domestic property. If an individual owns a vacant property, he does not have to pay rates on it.
There are arguments as to whether a demand that rates be paid on vacant property would act as an incentive to keep businesses open. We have yet to reach a final decision on that but we would tend to be of the opinion that it does serve as an incentive. However, others would argue that, in blighted areas, an incentive must be given that a property may remain vacant for a while after it has been refurbished or riverside flats may remain empty for a while after they have been constructed. Time must be allowed for people to take possession of them, upon which they will start to pay rates.
The Department of Finance and Personnel is saying that there is around £40 million in revenue forgone because we do not insist on collecting rates for vacant property, both domestic and non-domestic.
The Deputy Chairperson: It is a big issue and there are many different points of view.
Mr Wells: You used a neat throwaway line that the money that would be generated as a result of the abolition of industrial de-rating would be £1.4 billion, and that money could be used for capital investment. That is not how government normally works. The Government do not borrow. A sum of £60 million would be spent annually on capital projects, which would provide Mrs Courtney with the £18 million for Culmore and a couple of sewage works in my South Down constituency. Apart from the exceptional mechanism that was used this year, the Government do not normally use revenue to generate loan funding, which is spent on capital investment. Therefore, how do you arrive at a figure of £1.4 billion?
Mr McCusker: First, the figure of £1.4 billion was based on £100 million of revenue forgone. We are saying that there is a tendency in Northern Ireland to fund capital projects. Capital projects should endure. For example, our sewerage system has lasted for around 100 years. It is wrong to use revenue to provide for capital costs, and that is what the reinvestment and reform initiative is partly about. It is quite proper that money should be borrowed.
Money can be borrowed against revenue. One hundred million pounds of revenue can fund the borrowing of as much as £1·4 billion. That is the route to take. The problem is mainly with the infrastructure; it should last up to 50 years. Most people borrow money to provide a home for themselves, and it is acceptable to use one's revenue to borrow for a capital sum. The revenue of £100 million could be used if the Government wished to fund the borrowing of £1·4 billion.
Mr Gillen: The Programme for Government referred to the rating policy review and a working group on public-private partnerships (PPP). Those are linked, and ICTU has been asked to suggest fresh and innovative ways of generating money to meet the infrastructural deficit. One of ICTU's proposals is to link the review of industrial de-rating into the Programme for Government, look at the proposals relating to PPPs and see what alternatives can be brought to generate funding.
ICTU is concerned that the private sector will not be committed - and therefore unable - to meet the needs of the infrastructural deficit. The private sector may not want to take the associated risk, and that will mean that the Department will end up underwriting the risk. The Programme for Government, PPPs and the rating policy review are all involved in the process, but ICTU does not want them viewed in that order. ICTU wants to see how they can create some kind of synergy and generate money to improve infrastructural services and create jobs.
The Deputy Chairperson: It is a major issue with inter-linking factors.
MINUTES OF EVIDENCE
Tuesday 3 September 2002
Mr Neeson (Deputy Chairperson)
Ms Gillian Briggs )
Mr Wilber Mayne ) Ulster Farmers' Union
Mr Greg Shannon )
The Deputy Chairperson: I welcome Ms Gillian Briggs, Mr Wilber Mayne and Mr Greg Shannon from the Ulster Farmers' Union to this morning's Committee meeting.
Mr Mayne: I thank the Committee for inviting us. We are happy to respond to the consultation paper; Mr Shannon will give a summary of our thoughts on it. The Ulster Farmers' Union represents a wide spectrum of rural interest through its membership and also in the wider community.
Mr G Shannon: I shall briefly run through three major points raised by the examination of the rates procedure, after which my colleagues and I can answer questions. If the Committee wishes, we can provide formal written responses to any questions.
First, the union represents the vast majority of commercial farmers. There are about 13,000 members, including many large farmers and a rump of small farmers who are concerned about the implications of environmental legislation and everything that affects the countryside. We have always been conscious of our upstream and downstream linkages, even if we sometimes have head-to-heads with them. They are vital to the rural economy, since those firms and businesses support us, and we support them. They take our produce and do the best they can to make money for themselves and for us. As a result, the potential livelihood of a wide spectrum of people depends on the success of agriculture. Therefore, considerable emphasis should be placed on the issues which we shall raise today for the benefit of the countryside. Essentially, rates are regarded as another tax on the community. The existence of such a tax must be justified by the value of what it gives us and how that is delivered.
We propose to cover the matter in three distinct points: the concept of rates; the calculation of rates; and concessions. The current concept of rates is far removed from the original idea of using them to look after the local policeman, the poorhouse and so on. Local support services were minimal at that time. However, councils now carry out a multitude of functions based on the principles of local democracy. We do not question the need for that - it is useful and valuable that local people have input into what is done in their area, as it would be difficult to carry out such work satisfactorily in a broad sweep. There must be room for variation.
However, it is almost wholly funded by central government. In England around 85% is funded from central government, and the figures for Northern Ireland cannot be much different. Therefore, the Ulster Farmers' Union is concerned that the current paper does not deal with the fundamental issues which developments have created. That aspect must be examined fully before any options for the calculation of rates are evaluated.
Apart from the high level of Government funding, there is an issue of low yield resulting from changes in rates charges for two reasons. First, a smaller number of houses pay high rates. Secondly, those who live in smaller houses or are on low incomes get rate support from social services, so the money moves round in circles. Little is achieved by saying, as the paper does, that an extra £700 million could be collected if all concessions were abolished. That is a major fallacy.
The second point is that the calculation of rates requires a more fundamental review than that afforded by the paper. The current paper assumes that the basis for rates calculation is correct and that there is no other option. To produce a series of options on the perceived basis of raising more money is to put the cart before the horse. If the ratepayer is the horse, his or her ability to pay has not been properly considered. Once the ratepayer's income drops below a certain level, the money comes from central government, so the system becomes circular.
The strength of the horse has not been considered, nor has the size of the cart. The paper gives the impression that the cart will be larger, but no one knows what the money will fund or what the costs will be. To carry the analogy further, the loading of the individual horse fails to examine, or provide for, its ability to pay. That nearly proved the death knell for rates in Great Britain, and I should not like that to happen here.
It is vitally important that house size or perceived rental value is not seen as a guide to paying ability, for it does not take into account the fact that some people - through no fault of their own, perhaps having been left a large house which they are unable to sell - will be charged more. Not even central government takes that view when calculating income tax.
Rates are supposed to provide services, so why should people in different areas or living in different houses be charged a different price for the same service? I am not a lawyer, and I shall not examine the issue in depth, but I do not believe that it would stand up under human rights legislation.
Finally, there is the concept of concessions. Concessions are always brought into such systems and - dress them up how you will - they reflect recognition of two things: first, that the initial charge is too high for the industry or the individual to carry, and that therefore a built-in concession is necessary; and, secondly, that certain classes cannot gain access to services. On an agricultural point, domestic farm dwellings with an agricultural tie are valued at half the rate they would be if that tie were lifted. The majority of such dwellings with an agricultural restriction are retirement homes, and the procedure considerably reduces their value. It is therefore only right that such dwellings should have a reduction in the rates bill.
In tourism and rural areas, ratings for bed and breakfast premises and self-catering accommodation must be re-examined. Tourism accommodation is rated as a domestic dwelling, even though self-catering accommodation may have an occupancy rate of only 60%. Such a rating system must be taken into account when considering the farm diversification process which encourages farmers to diversify and in turn create a healthy rural economy.
We shall take members' questions; if we cannot answer them all now, we shall supply a formal response.
Mr G Shannon: Before we move on, I should perhaps mention that we provided a paper detailing the 10 review points. I used it as my reference, although I am unsure if members all have a copy. Most of those 10 points relate to my first two themes of the funding and calculation of rates. I left the concession issue blank in that context. We can highlight the number of the relevant point.
The Deputy Chairperson: The Committee Clerk has provided members with the paper.
Mr Wells: Do you appreciate that the Committee can deal only with industrial derating? The issue of rating is the preserve of the Department of Finance and Personnel. We cannot deal with wider issues such as the ability to pay and the services paid for by the rates. We can only consider the question of whether it is right or wrong that businesses, including agricultural businesses, should no longer be exempt from rates. That is why we have restricted our questions.
The argument concerning ability to pay was raised. Farmers can also apply for rates rebates. A security officer or hospital porter on a low wage who cannot afford to pay his rates can apply for housing benefit and obtain a rate rebate. I suspect that many farmers would be in a similar position.
There is a view that farming is a business like any other, and if the policy is that the benefit is abolished for all manufacturing businesses, then why should those in agriculture not also bear that burden and pay rates on their property and houses? I do not hold that view myself, but it will be raised during the debate.
Mr G Shannon: Thank you for those points. We worked from a paper that addressed issues broader than merely that of industrial use. We may have to go into the issue in more detail in a written reply. However, the first thing that must be recognised is that agriculture utilises a greater area than any other industry - even the industry of coal-mining does not extend across the land like agriculture does.
Secondly, it has been built over the years on a cost system which, to use your terminology, rightly or wrongly included rates exemptions. Even before the relative profitability of the business is mentioned, production and storage facilities are involved which are unlike those of any other industry which you might care to name. For example, a corner shop, foundry maker or even coal mine has a cash flow every week. If there is a bad week, there is a chance of the next being good.
In agriculture, there is one throw a year, and after that you have had it. There is a risk that the proportion of overhead costs taken up by rates, however calculated, will be completely disproportionate and impact on the ability to pay - and I am not speaking specifically of the current agricultural crisis. The agriculture industry is also in competition with countries and regions where, to a large extent, farmers get rates reductions or pay no rates or property taxes whatsoever.
If an individual cannot afford to pay his rates and gets assistance from social security to do so, what happens in the case of a business which has lost money during the financial year? Does the DHSS or someone else cough up for the rates, or are rates an immediate cost on the business which must be settled regardless, with the result that it is "too bad" if a business goes bankrupt?
Mr Wells: So it does happen?
Mr G Shannon: In the current context and for the foreseeable future, a situation would arise regarding the industrial part of the farm, if you wish to class it as such, where 95% of farmers would become bankrupt inside one year.
Mr Wells: I accept that. However, there is an argument that farmers are sitting on a very strong asset base. The great paradox of the farming situation in Northern Ireland is that, while farmers' incomes have shrunk to practically nothing, the value of land and farms has continued to rise inexorably. In my constituency, farms are selling for absolutely crazy money, and no one can understand how that can ever be recouped. On the basis that rates are fundamentally a property tax, surely those who have the most valuable property should bear some of the burden to provide services for the wider community.
Mr Mayne: Most properties being sold are not being bought by farmers but by people who wish to develop the land. Take Mr Shannon's equation a little further. New Zealand, with whom we are trying to compete in a world market, operates an extensive system of farming with very few buildings. In comparison, Northern Ireland operates an intensive farming system where much of the stock is kept inside. If some agricultural buildings are to be rated, that will knock us straight onto an uneven playing field with our competitors in the rest of the world.
The Deputy Chairperson: The thing that interests me in what you are saying - and perhaps you could give us a follow-up response - is the situation in relation to rating in other EU countries, particularly in relation to agricultural land. That would put things in perspective. You have mentioned New Zealand. The Committee has great sympathy regarding the problems which have beset the agriculture industry in the past few years. Do you have any comparisons from within the EU?
Mr Mayne: No.
Mr G Shannon: It may be possible to find out. It will take some time.
The Deputy Chairperson: How about the Republic?
Mr G Shannon: The Republic of Ireland has abolished rates. It is working, presumably, on central government funding. A county council gets a grant, and it is best to live within that and provide the expected services.
The fundamental point is that there is a great deal of money coming into local services from central government - about 85% of total funding - and much of that appears to be going round in circles. We wonder why no one is examining the issue fundamentally. If a council decides to fund local transport by subsiding buses, it is very difficult to do the same for a rural dweller. I am deliberately using the words "rural dweller" rather than "farmer". The authorities will find it extremely difficult to send out a bus when he wishes and at a reasonable price.
There are many issues where the rural dweller is at a complete disadvantage. It is environmentally wrong to send out a 30-seater bus at five miles to the gallon when someone can drive in at 30 miles to the gallon with his family. You need only put two people in a car to balance the public transport rate. There is something wrong there, but it is not for this Committee to deal with. It is a fundamental fact for all rural dwellers. Many matters for which they are left responsible do not affect the urban dweller to any great extent. If the authorities decide to do something for the urban dweller, that is much more economic, and that is why it is got away with.
The Deputy Chairperson: You will be glad to hear that there are two farmers on the Committee.
Mr Armstrong: I noticed that some of you view rates as just another tax. Most people do so, since it is a way of collecting money from an area to finance services in it. Anyone required to pay tax should be in a profitable situation. In rural areas, the profitability of small farms and small businesses is low. We should abolish the rates, as the Republic of Ireland has done, and find another way of collecting taxes.
I am sure that some of you have ideas on how that tax could be collected other than through rates, and I should like to hear them.
Mr G Shannon: I welcome your comments from a farming point of view. However, the union does not feel that it is in a position to provide the final answer. There are many other people whose views must be taken into account.
Central government funding is easy to collect. One adds another 1% to the income tax rate and - hey presto - one has done two things, the first being to make collection cheaper, for it costs no more to collect than existing income tax.
Secondly, those least able to pay are not asked to do so. However, that must be balanced against the power given to central government to control local economies. How tightly would they set the rules? If, in my case, Lisburn City Council were given £25 million from central government, and the council decided to spend £1 million of that on something original, would it get thumped around the ears for being so daring? Spending that money might be the answer for Lisburn City.
People would then be inclined to say that it does not matter who is elected locally - he is already controlled with so much money to spend; he has a task, and it is up to him to carry it out. Regardless of whether it works like that, it is the fundamental problem and shows a potential benefit of people contributing locally. Someone must decide if it is only housing which we are considering, for when industrial rates are raised, that will eventually be realised in higher prices.
The situation arose with the creation of enterprise zones with no rates levied. That was fine, since it got people involved and attracted many businesses into those areas, since they could get out of paying rates to Magherafelt, Coleraine or whomever. The industry could not afford the rates burden, and people were going to be put out of work. The Department of the Environment paper does not deal with that fundamental issue, and, although I appreciate Mr Wells' point about industrial derating, the question must be dealt with in the long term. If we could employ Solomon as a consultant, it would probably work out very well, but we have not got him, and many people will simply have to do their best. I am hedging my answers because I see so many implications, no matter which way we go.
Mr Armstrong: I sympathise with you. Would you consider some other commodity or article being taxed rather than rates, for example, discouraging something that is frowned upon in our society, instead of levying a rate?
Mr G Shannon: That is nearly unanswerable, Mr Armstrong. My point is that the current rates system does not take the income of a person into account. It is easy for someone to put his or her P45 or P60 on the table detailing income, but a self-employed person, as most farmers are, may find it more difficult to claim rate rebates.
Secondly, we already effectively have three taxation systems, including rates. The Inland Revenue Custtakes income tax, and the second system is VAT throughoms and Excise. Value Added Tax has the same problem, although it is not as noticeable, since assistance is given to people on low incomes and 17·5% is taken off every product regardless of whether a person is able to pay. That may be fair, working in the same way for everyone; however, it means that the higher-income earner can always buy more. If any other system is put in place, higher collection costs are incurred, since differential rates must be imposed in different areas. There must be some way of dealing with that to allow local authorities to design a programme in their area for such mandatory matters as sewerage and water. Local authorities may want to do other things supported by their local representatives. A case is made, and the money is taken out of a particular pot. Local authorities therefore have control; they need not spend one or two years persuading someone behind a desk that they have a good idea. That is currently happening in rural development. By the time the necessary authorities are persuaded of the viability of an idea, the opportunity has passed. Quick responses are required.
Mr Armstrong: Do you agree that rates were one way of getting money quickly with no questions asked?
Mr G Shannon: All matters must be balanced and consideration given to the person who is being disadvantaged.
Mrs Courtney: I come from a rural background and have served that community as a councillor for over 17 years. I have sympathy with what Mr Shannon said, particularly with regard to transport. It is not practical for anyone to put a bus on the local roads in my area. The same school bus service operates now as operated many years ago.
Nothing has changed in rural areas except that farmers have more problems. There are fewer farms, and the farming community has diversified almost totally. Planning permission is difficult to get - I blame the planners - and the Department of the Environment has a lot to answer for. The Planning Service should be strongly targeted, not only to provide rate relief but to allow the building of more houses in rural areas. That would enable people who have gone away, made some money and want to return to live on the farm to do so. The farms cannot sustain the two houses, and those returning to them are diverted into the urban community where there seem to be incentives for them. There is no incentive to move back to the countryside, and it is being left bereft. The Planning Service is responsible for a great deal of the problems created over the last few years.
Mr Clyde: I agree with Mr Armstrong about the rating of farms, but I should like to see farm dwellings exempt from rating. Farmers in Northern Ireland are becoming older and fewer. A rate exemption would encourage young farmers to take over the farm instead of going away to work. There are a great many young farmers now, and, if they want to manage their father's farm, they must find another job to supplement their income. Farm dwellings should be exempt from rates.
Mr Mayne: The first problem encountered by a farmer who wishes to diversify is the Planning Service. If the farmer does get a project up and running, he is rated - unless he is manufacturing something, and that is seldom the case. They usually diversify to machinery repairs or bed-and-breakfast businesses. The farmer is therefore hit straight away from two angles. I agree with Mr Clyde.
Mr Armstrong: I am introducing a private Member's Bill in the Assembly which, if successful, will mean the horse being treated as an agricultural animal. That will mean that rates will not be payable on buildings or anything else connected to the horse industry.
The Deputy Chairperson: Thank you for attending the Committee meeting.
MINUTES OF EVIDENCE
Tuesday 10 September 2002
Mr Neeson (Deputy Chairperson)
Mr J Simpson
The Deputy Chairperson (Mr Neeson): Welcome, Mr Simpson.
Mr Simpson: I thank the Committee for inviting me. I was interested to see that the Committee is examining this aspect of the overall rating system because it is an important issue in the context of the review of rating policy.
As the Committee can see from my submission, the time has come for us to be prepared to abolish industrial derating on the grounds of equity and effectiveness. Many businesses will defend the continuation of derating on the basis that they would incur an extra cost if it were abolished. If I were in their position, I would say that also. Equally, there are hundreds, if not thousands, of businesses that, having considered the impact of rating policy, regard industrial derating as implicitly unfair. For instance, if I were involved in the development of the tourist industry or services related to information technology I would be asking what differences there were between my sector's contribution to the economy and that of the manufacturing firms to justify differential treatment. In short, in view of the other aspects of derating, the argument of inequity among ratepayers is a strong one.
The second argument in relation to inequity concerns impact. If £60 million a year is being spent to improve the Northern Ireland economy, we must decide on how best to use that money. If it is decided that, instead of creating a level playing field for rating, industry should be derated, which would cost £60 million, I must ask myself whether that money could be better spent. In my paper, I suggest that £60 million is the equivalent of, for want of a better estimate, a couple of thousand jobs a year in new industry, or is the equivalent of the base on which the Executive could leverage the borrowing of several hundred million pounds for the reinvestment and reform initiative that is on everyone's minds. If inequity is to be avoided, and if impact and value for money are to be maximised, industrial derating can no longer be justified. That lesson has been learnt in England, Wales and Scotland, where these decisions were made a long time ago.
Mr Wells: Have you had the opportunity to consider the CBI evidence to the Committee on this issue?
Mr Simpson: I understand that the CBI argued the opposite case.
Mr Wells: Yes. The CBI argument is based on equity also. It has no problem with the creation of a level playing field for Northern Ireland industry and its competitors in the rest of the UK and the Irish Republic. However, it states that until we grapple with, and solve, the issue of the differential in electricity prices, a major component of our industry's input costs will remain higher. Therefore, industrial derating, which affects many companies that are high energy users, such as the cement industry and companies such as Shorts, should not be abolished until that problem has been tackled.
Mr Simpson: I respect the CBI's argument, but it is a spurious one. In our economy, we do not consider the structure of all costs and say that, to be fair to one region, we must equalise its costs with those of other regions. Other differences exist, the most significant of which, particularly in the private sector, is that firms here operate at lower labour costs than firms in most regions in Great Britain. An equation that takes account of electricity prices, rates, corporation tax, shipping materials in, and exporting the finished product cannot be applied to the real world. We cannot build a business sector on the basis that for firms to respond competitively to the market, all costs in all regions must be equalised.
If the gap in electricity prices is significant in your thinking, a second point to make is that the gap is narrowing. In a few years time there will not be a major difference in cost. We should not regard the comparison of the costs of one factor, such as electricity, as the right way to approach this matter. However, if you are going to choose to focus on that single cost, you should note that, given the way in which competition in the electricity industry is developing, you will have a diminishing argument.
Mr Wells: Invest Northern Ireland (INI), formerly the Industrial Development Board (IDB), is pitching for new investment for Northern Ireland. It is in competition with the Irish Republic, which has abolished rates, and with other parts of the world that have soft arrangements for the equivalent of property taxes. One of the major cards that INI can play, in addition to Northern Ireland's good, well-skilled workforce, is that companies that invest in Northern Ireland do not have to pay any form of rates. Is it wise to remove that card from the pack for INI?
Mr Simpson: We must be realistic. When a business is deciding where to place new investment, it will consider the underlying costs and its competitive position. It will also take account of the degree to which the Government of the area alters cost structures. The argument is that industrial derating makes a big difference. However, we are spending approximately £60 million a year on derating just to allow existing firms to stay where they are. Hypothetically, if that money could be loaded at the front end to make it much more attractive for new firms while taking it away from existing firms, who should have established their competitive base, I would have some sympathy for the argument.
What we seem to be saying is that in the hope that we might marginally attract new businesses, we will offer them the equivalent of 1·5% of their labour costs in derating. That is a small difference. If we need to do something to front-load the attraction of investment, it is not justified by backloading the underpinning of finances of existing businesses. That is an old argument: you want to focus your development policy on making changes happen, and if, over time, businesses have established themselves, they should be able to justify themselves in the competitive market in the conditions they are facing.
In recent years, the competitive position of most manufacturing firms in Northern Ireland -there are one or two significant exceptions - has improved. Five or six years ago, I can recall expecting to see significant losses in the company results. However, with one major exception, we are not seeing continuous major losses. We are seeing businesses converting to the real world and saying, "We will compete".
Mr Wells: It reminds me of the story of the SDLP Mayor of Armagh. A bomb exploded in Armagh, and the mayor was asked whether he felt that it would deter tourists from visiting the city. He said that he had never met a tourist in Armagh who had been deterred by the bombing. He needed to talk to the thousands of tourists throughout the world who would have come to the area, but did not. You said that you have not come across firms that have been put off relocating. People here may not have been deterred by the bombing, but what about the people who were?
Mr Simpson: That is an interesting argument and a fair point. I do not believe that there are people in the finance houses of New York and the political chambers of Washington who fulfil that bill. If I tried to persuade people to take an interest in Northern Ireland, I would want to sell features other than derating.
Mr Wells: Representatives from the Northern Ireland Committee of the Irish Congress of Trade Unions (NICICTU) discussed the same issue with the Committee last week. They came up with an interesting figure, and I would be interested in your opinion, as an economist, on it. They said that abolishing derating and rate relief on vacant properties would generate income of £100 million per annum, which could be used to lever £1·4 billion of infrastructure investment. How is that possible under the Government's present policy of spending only revenue on capital investment?
Mr Simpson: My interpretation of that is similar to the comment that I made by way of introduction. One option is to think of the money as a way of levering further investment. I would have put the ratio more modestly, but there is a ratio involved. This is made possible because of the agreement that the Treasury reached with the Executive on the reinvestment and reform initiative proposals. In the past, Northern Ireland did not have permission to borrow, which is Mr Wells's point about financing initiatives from revenue. The Treasury agreed that if there is to be capital investment, we may borrow the capital provided we organise Northern Ireland's finances to ensure that there is the capacity to repay it at the national loans fund rate, which is an especially attractive rate of borrowing. NICICTU is right to say that if the concentration is on public sector investment, that mechanism will increase leverage.
Vacant property is another issue - I am ducking it, just putting it to one side. If the only change to be made were the abolition of derating, the Northern Ireland Exchequer of the Department of Finance would have £60 million a year more, which is - at national loans funds rate - cover for borrowing a significant amount. NICICTU put a figure on that amount - I would talk about £500 million, but the amount is considerable.
Dr O'Hagan: You are saying that industrial derating is not a big incentive for foreign investment coming here. Should we go down the road of industrial derating; do nothing, or should some other process be put in place?
Mr Simpson: The answer to your question goes in two different directions. If £60 million were freed up, the Assembly would have the choice about how to spend it. A question for another day, but which is relevant to your agenda, is that if the money were freed up, would it be spent on economic development - not just industrial development but broad-based economic development, using other means - or would it be spent on public infrastructure?
There is no right answer to the question. Public infrastructure needs to be reinforced, but, equally, Invest Northern Ireland - the agency that is at the forefront - needs the ability to be more flexible in its approach. I am sure that the Deputy Chairperson does not want me to open up the debate on how Invest Northern Ireland should approach its policy and, therefore, its spending. We would all have ideas on how to make it more imaginative. I hope that we will see evidence of that in the next couple of years.
Dr O'Hagan: Is the figure of £60 million exact or an estimate? You mentioned £60 million, and NICICTU mentioned £100 million last week. How accurate is the figure of £60 million?
Mr Simpson: My understanding from what Mr Wells was saying is that the figure of £60 million for industrial derating is official in the Government statement. The other £40 million must be an estimate they have made for the lack of rates on empty property. That raises an interesting set of issues. At the moment there are many empty properties. I presume that the business community, particularly property owners, would be the last to volunteer to pay rates on unoccupied properties.
Mr Armstrong: Most people look on rates as a type of tax. As you say, derating has been abolished in the rest of the UK. However, industry in the UK is self-sufficient, whereas Northern Ireland is a small country that makes many products for export. There must be some incentive to enable Northern Ireland to compete with other countries. If Northern Ireland does not have derating, something else must be put in its place. The argument is currently about abolishing derating. However, Northern Ireland must hold on to something that will encourage small companies and would persuade them that although they would have to pay a small percentage of their revenue, they would become more profitable.
Mr Simpson: You are correct to argue that anything that takes something away, such as derating, will be unwelcome. Some firms will say: "Look what this is doing to our cost structure", and: "We must compete in order to export". My only answer is that a large proportion of industrial derating is on businesses that sell on the home market. Its focus is not to encourage trade outside Northern Ireland. It is evenly spread. The argument is that derating is not sufficiently focussed to make a difference and that we ought to consider policy issues. I believe that Dr O'Hagan had those issues in mind; that we ought to consider policies that will make a difference. In other parts of the UK, derating has been abolished on the grounds that it is too thinly spread to be effective.
A Scottish industry in Inverness could make the same argument that you have just made. However, to encourage industry in the north east of Scotland, people there are arguing about different things and being more precise. Scotland has its own agencies such as the Highlands and Islands Development Board. We have to say that if a thin layer of funding is put across the firms that employ 100,000 people in manufacturing, at no point is it thick enough to make a substantial difference - but it does make a difference to the finances of the Northern Ireland Executive.
Mr Armstrong: What is the point of changing until you have something else in its place? You have to have the other measure in place before you go forward. There is nothing in place at present, so why change?
Mr Simpson: That is a fair point. I would not be so negative about the other things that we are ready to put in place. The easiest answer is that most of the Departments have got schemes that they cannot advance because funds are not available. If the necessary funds became available to the Executive, would they allow the enhancement of the transportation strategy, the labour training strategy and 'Invest Northern Ireland'? The answer is potentially yes. Mr Armstrong asks not to take the existing rule away until something is put in its place. However, there are plenty of bids to use the funding, and they would benefit the whole economy. Mr Armstrong is concerned that that will not do anything for the firm that would have to pay £1,000 in rates that it does not pay now. There is a distinction between the particular impact and the general impact, and therein lies the difficulty. Proposing to abolish derating will never be popular with manufacturing industry, but it is popular with the rest of the businesses in the economy who are keeping quiet because there is no merit in shouting from the rooftops that they would like a fairer system. The hotel groups, IT groups and many other service industries will say that it would be fairer to abolish de-rating.
Mr Armstrong: Some industries occupy buildings that are not used 24 hours a day. The owners of those businesses think that they are being discriminated against regarding rates. How do you propose to deal with those industries that need vast amounts of space for their business but are rated similarly to small firms?
Mr Simpson: One of the effects of derating is that there is a minimal cost in keeping empty space. Owners will provide heat and light, but they do not pay rates on the space. Therefore if there was a proposal to take away industrial derating it should be done with a period of notice. You will then find that firms will become conscious of the costs of space. There is some evidence in the PIEDA Report that one of the effects of industrial derating has been to affect property rents as much as business costs.
I agree with Mr Armstrong. If I had adequate space and industrial derating were abolished, I would ask myself if I needed such a large warehouse or so much space for storage or temporary production. There will be an incentive to use space more effectively across all industries. I thought that Mr Armstrong was going to say that the impact of the derating would be bigger away from Belfast than in Belfast, and I do not think that that is a strong argument.
Mr Armstrong: Equestrian centres have vast amounts of space that cannot be utilised any better because the space is required for the business. What will happen in that situation?
Mr Simpson: If the business needs the space then it has to pay the rates. If there is a public policy case for doing anything to encourage people to take their businesses forward, that has to be argued on its own merit. The case for giving them incentives to grow is not met by simply saying that they have derating, because it is a passive thing.
Ms Morrice: I am keen to push the traditional manufacturing sectors in Northern Ireland. I often argue that we can sail into the dot.com industries or the information age, but that that is transient. We have a reputation for textiles, food products and shipbuilding, and we should not scoff at that. We should develop that more because, for example, clothes will always be needed. In the light of that, it would be right to differentiate between the industries and support the manufacturing sector. My argument, therefore, is that we should keep industrial derating to support the manufacturing base because Northern Ireland needs it. What is your argument to the contrary?
Mr Simpson: I also want to have a system that supports the expansion of business in Northern Ireland - particularly of business that will add value by selling to the rest of the world. Derating, however, is not focused on doing that. Derating is a passively available sum of money, whether you are expanding your business or not. It is available whether you are exporting or selling outside Northern Ireland or not. It is not incentive related. That is the core of the issue that we are talking about.
Ms Morrice: There are no strings attached. Do you want strings attached to any money that is given?
Mr Simpson: What you call "strings", I would call "well-informed policy".
Ms Morrice: In other words, the Government would only give firms the money if they agreed to export, carry out research or innovate.
Mr Simpson: Government support is given for a reason; derating is available despite the fact that it is insignificant for a great many firms.
Ms Morrice: There is a strong lobby in the other direction. The trade unions were on your side of the argument. Although they are ready to look at arguments to the contrary, they are leaning towards the removal of industrial derating. There is the question of potential job losses. We have just lost 400 jobs at Bombardier. Could more jobs be lost if we take away this incentive?
Mr Simpson: In your position it is reasonable to be apprehensive about doing anything to increase the costs of businesses functioning in Northern Ireland, however it is located. I understand that. However, any consequential impact on business by removing derating would be very small and short-lived. The Bombardier case, which is in our minds at the moment, is not significantly altered by whether or not Bombardier is getting derating. It is dealing with production planning and the flow of work in a way in which the nature of its cost structure through derating would be of very minor impact. I have come back to the argument that if we find methods of being focused and delivering policy, then there is an argument. However, this is not focused.
Given Ms Morrice's previous experience, industrial derating must offend her in terms of her understanding of European policy. It is an operating aid, which the Competition Commission, if it notices it, should say is not the kind of thing to be encouraged across Europe.
Ms Morrice: It depends on which hat I am wearing, whether it is the pro-European one or the Northern Ireland one.
Mr Simpson: Far be it from me to comment on your dress style.
Ms Morrice: What would you suggest implementing if we were to take away derating? If we removed the support for Bombardier provided by industrial derating - I do not have the exact figures - what should we put in its place to get Bombardier going in the right direction?
Mr Simpson: I can answer that question relatively easily. The most potent incentive that Bombardier can be offered is launch aid with new projects. That is a major issue in the aircraft assembly business. Bombardier will often argue that its competitors get launch aid, and that it also deserves it. That becomes an important issue between the Department of Enterprise, Trade and Investment here and the Department of Trade and Industry in London. The second important issue is that when there is a skills shortage, mechanisms that use funding to support the firm's ability to enhance skill development are more important than anything else.
As a result of the work that we carried out in west Belfast and the Greater Shankill, Bombardier is volunteering to be involved in a major labour training exercise, which will help the firm in terms of recruitment and will help those areas of need. That will be much more significant than anything that ever happens through derating.
Ms Morrice: Would launch aid be legal in European terms?
Mr Simpson: Yes, it can be. It is a technical issue, but I believe that it can be legal.
Mr Wells: I am sorry; it is Alasdair McDonnell's turn to speak.
Dr McDonnell: I will be brief because Jim Wells wants to come in, and he is far brighter than me. Most of the ground has been covered, and I broadly agree with much that has been said about equity. However, do you feel that abolishing derating would push any firms under?
Mr Simpson: Hypothetically, that is possible. However, if a firm is so close to going under that derating makes the difference, then it must be in a vulnerable position anyway.
Dr McDonnell: All we are doing is buying six months.
Mr Simpson: Yes, possibly.
Dr McDonnell: I am being oblique, but you mentioned rating empty property. Can you give the Committee any information on that? I have long held the view that derelict or semi-derelict properties around Belfast could be charged partial rates of 35% or 40% rather than being rate free. Would that make a major contribution? Do you have any information on empty property?
Mr Simpson: I do not have a strong view on what we should do with empty property. One of the effects of imposing even partial rates on empty property will be to accelerate demolition of property that is never going to be used again, because it may as well be knocked down as pay one third or one half of the rates on it. One consequence will be that we will need to think more clearly about what we mean by our urban redevelopment policy. As a result of our exercise, one issue that is very much in our minds for the Shankill and west Belfast areas - and it also applies elsewhere - is that there is a great deal of property that is no longer appropriate to this century. We do not have an urban regeneration policy that will revitalise some of the inner city areas, particularly along the arterial roads. If we introduce rates on empty properties, we will see people demolishing them, and empty spaces starting to appear. If that were part of a bigger process, which then put incentives in place for regenerating those areas, rating empty property would be a good idea. However, it does not become a single stand-alone issue. If we are going to rate empty property, it must be because we want to see a policy and a process of change.
Dr McDonnell: You mentioned a figure of £60 million, which would be the product of the rating of industrial property. Would that be an extra profit, or is it more equitable to dilute the burden as a whole?
Mr Simpson: I shall put myself in Dr Farren's shoes to answer that. Dr Farren is presented by the Treasury with the argument that Northern Ireland cannot continue to finance itself from rates in such a favourable way relative to the rest of the United Kingdom, and it is time to put the house in order. If funds become available in this way - and I agree with the Minister on this - they would have to be put into the Executive funding, so that they can do more.
Mr Wells: The only reason that I rather rudely interrupted was to follow on from what Jane Morrice said. It was not an attempt to cut in.
Dr McDonnell: You do it all the time.
Mr Wells: Perhaps Dr McDonnell should get first crack at the questions the next time round. My point is relevant to the points raised by Ms Morrice and Dr McDonnell. If the £60 million were intended to provide further incentives for inward investment, it would make life a lot easier for this Committee. However, that is not what is going to happen. The Minister for Regional Development, wise man that he is, will snaffle all of that money and perhaps even raise a loan on the basis of it for infrastructure spending for roads, sewers and water.
We all accept that it is vital that that work be done. It might cost £100 million, but improving a sewer will not do anything to increase employment in anything other than the construction industry on a temporary basis. In other words, a good sewer going into Shorts is a great idea, but it will not employ one extra person in that factory. If it is not hypothecated to the Department of Enterprise, Trade and Investment, then surely it will ultimately hamper industrial investment in Northern Ireland.
Mr Simpson: I agree with Mr Wells that, to make the case as convincing as possible, it would be nice to be able to present it as two sides of an equation. In 2002, the problem in answering his question is that Invest Northern Ireland has more money than it knows how to spend. It does not have the bids to take the funding that is available. If we look at the way in which the Executive's funding allocations have been altered in the last couple of years, we will see that Sir Reg Empey's Department has, without too much protest, released funds for other purposes because Invest Northern Ireland and its predecessors have not been able to justify the original allocation.
When more business activity flows into Northern Ireland that could change; for the moment, however, the best that I can offer in the circumstances is that the Confederation of British Industry and other business interests make the case very strongly that one of the biggest deterrents to business at the moment is that we are so far behind with our transportation policy. It is not the most popular thing to argue, but there are few cities in Britain or in Europe with cross-city roads and communications as bad as Belfast's.
The Westlink in Belfast is a disgrace by the standards of most other European cities. Because of my European connections, I have had to visit several cities there - not necessarily capitals - and they are all installing better communications in a way that makes us look as if we have not learnt the lesson. Dublin has the same problem. It is an all-island problem, and any of you who have driven across the island will have seen it.
What is the trade-off? If the trade-off were that, as a result of doing this, the Westlink would be upgraded within the next five years instead of the next 15 years, I would try and sell that to the public.
The Deputy Chairperson: As well as the improvement of the A2, with which I am sure you would entirely agree.
Mr Simpson: I would not mention that road in your presence.
Mr Armstrong: You state that the profitability impact of derating would be about 2·7% on annual profits. Some companies are performing well and people are depending on them, but they are not making much more than 2·7% profit. If you take United Dairy Farmers and go back to the farming structure, many farmers would like to make 2·7% profit. If that money were taken out of United Dairy Farmers' budget, many people on the ground would be affected. Would it not be better to let the £60 million you are going to get from derating stay where it is, rather than spend it elsewhere?
Mr Simpson: My understanding is that profit margins in the dairy sector and across the farming community are very tight, and the past five years have seen an unprecedented deterioration in the situation. Bear in mind, however, that industrial derating, whether it exists or not, will do very little for the dairy farmer. It will do something for the dairy processor, but it will only put a fraction of a penny on the wholesale price of milk.
Mr Armstrong: But we need that fraction.
Mr Simpson: We would do better to get the dairy industry sorted out in European terms and not rely on Northern Ireland's derating having a very indirect effect to do it. We should be tackling other problems that would have a more dramatic impact.
Mr Armstrong: But if that £60 million is helping someone to continue in business, it should stay until something else is put in its place - do not jump the gun.
Mr Simpson: I cannot disagree that it may have some impact on a dairy processing company and its viability, but it is the supplying farmers, at the end of the auction link, who are losing out in the present dairy arrangements and who are getting a lower price. By and large, the processors are still making a profit. It is the same with the beef industry; when beef prices were down the red-meat processors were not losing money. Dairy processors are more vulnerable, but they are not completely vulnerable.
Mr Armstrong: Tesco recently recommended that the industry should pay farmers an extra two pence a litre for their milk, but Tesco was not going to lose any of its profit.
Mr Simpson: We are talking about where the profit margins go in the chain that runs from the farm to the processor to the distributor and on to the retailer. What happens at the retailer's point is not going back up the line to the farmer.
Mr Armstrong: All the profits of United Dairy Farmers go straight back to the farmers.
Mr Simpson: That is if the diary farmers are getting a decent price. We are arguing, however, as to whether derating would make a difference to that price, and my conclusion is that the difference would only be a very small fraction.
Mr Armstrong: It means a great deal to the individual farmer.
Mr Simpson: It would mean more to the farmer if it were a significant change. Our point of disagreement is that the margin when it gets back to the farmer will be immeasurably small.
The Deputy Chairperson: In your written submission, in relation to the PIEDA report, you say that one of the consequences of derating would be enhanced property returns and that an end to derating would, over time, produce a trade-off in property rentals that would reduce the impact of the change. Can you elaborate on that?
Mr Simpson: That means that where industry rents property in which to conduct its business, one of the derating impacts is that the property market reflects the knock-on effect of what the industry can afford to pay. According to the PIEDA research evidence, derating has partly impacted in property developers being able to charge slightly higher rents. Although it is a small effect, it is not what was intended. PIEDA think that it is worth mentioning, and so do I.
Importantly, if derating were taken away, the property market would not discriminate any more between the end users, and the process of the property market getting a higher rent because industrial derating is in place will be eroded. I have been challenging Mr Armstrong on small differences, and he could come back at me and rightly argue that there is another small difference the other way.
The Deputy Chairperson: The other issue is timing, and, following on from the points Mr Armstrong has made, probably the most impassioned plea against change came last week from the Ulster Farmers' Union. At the same time we see Bombardier in difficulties with its profits and so on. If change is to come about, is it something that should happen overnight, or should it be phased? What way should the Department approach it?
Mr Simpson: My intuitive suggestion is that you give notice that it would be abolished as from 1 April 2005. From 1 April 2003 it should be removed to the extent of one third; in 2004 it should be removed to the extent of two thirds; and in 2005 there should be full imposition. There is an argument that we should phase the change just as a matter of human interest. There may be an argument that it should change at a different rate for businesses below a certain size. Although that would attract a certain amount of sympathy, it would be too difficult to implement.
The Deputy Chairperson: Thank you very much for coming along this morning. We have really appreciated your evidence. The Committee will be reporting to the Assembly in due course, but we have not yet established a timetable for that.
Mr Simpson: Thank you for the invitation to attend.
CBI NORTHERN IRELAND
13 September 2002
- The Reinvestment and Reform Initiative is welcome, but it is essential that the Northern Ireland Executive, as a priority, secures efficiency savings from existing expenditure - there are a number of key areas where savings are achievable.
- The business community already pays a disproportionately high percentage (c 57%) of rating revenues relative to the rest of the UK, where the rates burden is shared evenly between the domestic and non-domestic sectors.
- Industrial de-rating should be retained until 2010. This is required in order to reduce the significant negative impact (particularly on investment and jobs) of removing de-rating. The Executive must reduce Northern Ireland's high cost base in the intervening period.
- A CBI Northern Ireland survey to assess the impact of the removal of de-rating, covering 72 companies employing 36,000 people, reveals that:
- over 50% of companies indicate a substantial reduction in employment
- over 65% indicate a substantial reduction in capital investment
- over 25% of respondents will face a rate bill in excess of 50% of their profits
- 50% of companies identify having the lowest cost base as the most important factor influencing investment
- An expensive tax with lots of reliefs is a bad tax - the CBI does not favour the introduction of more reliefs, other than having some form of Hardship Relief.
- Commercial rate payers are already paying rates marginally higher than in the rest of the UK - the Executive needs to ensure that this sector of the economy is not penalised further.
- A clearer understanding and assessment are required of the impact of introducing rating to vacant property. There is no clear rationale for Northern Ireland to be different from the rest of the UK.
- The current system of taxing occupation and basing rateable value on rental value is the most appropriate system - no substantive reasons have been put forward for change.
1. The CBI is an independent, non-party political organisation funded entirely by its members in industry and commerce. The CBI represents companies from every sector of UK business, including more than 250,000 public and private companies, over 90% of which are small firms with fewer than 200 employees and more than 200 trade associations, employer organisations and commercial associations. The CBI is widely recognised to be the UK's business voice and is therefore well placed to make representations on behalf of employers.
2. The CBI welcomes the opportunity to comment on the Rating Policy Review. This paper is based on extensive consultation with our members including approval by the CBI Northern Ireland Council, and includes a survey into the likely impact of the removal of industrial de-rating. Our response is set out as follows:
- Section on the Reinvestment and Reform Initiative
- Principles which should underpin rating policy
- Non-Domestic rating issues, including Industrial De-rating
- Funding for Water and Sewerage services
- Set of Appendices
3. The CBI represents business interests and we are therefore best placed to comment on issues which impact on businesses. We have therefore focused our comments on non-domestic rating issues. With regards the domestic sector we wish to make a few short comments only. These are as follows:
- It is difficult to argue for similar standards of public services as in the rest of the UK if we are not prepared to contribute similar funding - there appears to be a strong case that domestic rate payers should pay more.
- We would be concerned at any sharp, sudden rise in domestic rates in the near future. Any increases must be phased and adequate warning given. They must also take account of other high costs, including energy costs, and to some extent Northern Ireland's lower average earnings. Average NI earnings are 18% below the GB average but this heavily influenced by the high earnings in London and the Southeast (58% and 26% higher). Compared with Wales and several of the other English regions, average earnings in Northern Ireland are within 5% of these areas yet these regions all face much higher domestic rates and water charges.
- We must consider the higher level of disadvantage in Northern Ireland.
- A substantial increase in domestic rates will impact on the economy by reducing consumer spending power - this impact should be considered as part of the overall assessment.
- Careful consideration must be given to the issue of an equitable distribution of the total rate bill - compared to GB the non-domestic sector in Northern Ireland pays a disproportionately high percentage of overall rate revenues. The non-domestic sector also pays for water and waste management services and appears to be cross-subsiding the domestic sector.
REINVESTMENT AND REFORM INITIATIVE (RRI) - EFFICIENCY SAVINGS MUST COME FIRST
4. We have long argued that there is a need for significant additional investment in the strategic road infrastructure, public transport, water, sewerage, and capital projects in health and education. The proposed borrowing facility and low interest loan is clearly a welcome opportunity to provide an additional means of securing upfront investment - paid back over an extended period. The RRI will have an important contribution to make combined with other approaches, including the appropriate use of Public Private Partnerships (PPPs), which we believe have a key role to play in meeting three objectives: addressing the infrastructure deficit; helping to improve the quality of public services and securing better value for money from public expenditure.
5. We do not believe, as was suggested on the day of the announcement, that the funding needed to address the infrastructure deficit should be entirely related to an increase in rates. There are certainly major opportunities for savings in relation to improving the efficiency and effectiveness of public expenditure. CBI Northern Ireland has identified several areas where significant cost savings can be realised, including public procurement, use of e-commerce, reducing absenteeism and extensive benchmarking across public services. A firmer control of administration costs including less administration is clearly required. It is therefore critical that we secure reform of public services - the commencement of the Review of Public Administration is therefore welcome. The business community, and indeed domestic rate-payers, will increasingly want to know that the money is being used wisely and not on excessive administration, duplication or waste.
6. Furthermore we hope that the Executive will identify redundant and/or under-utilised properties and land within its own control, and embark on realising funds which could be used for more urgent and relevant investment. The CBI has been pressing for a wide-ranging property audit for some time.
7. A major increase in investment both in public infrastructure and services must be managed effectively. We therefore support the establishment of the Strategic Investment Body. In terms of a significant increase in investment levels the impact of this on the Northern Ireland economy should also be assessed. For instance:
- while increasing employment directly in construction and related supply activities there may be negative implications for other sectors in terms of labour availability and additional upward pressure on wage rates;
- intelligent purchasing is required to ensure best value for money and to help develop new capabilities in Northern Ireland based companies ensuring that the multiplier effect of this investment is maximised.
The Principles which should apply to Rating Policy
8. We believe the following key principles should apply to rating policy:
- Business rates are a tax and, as with all taxes, the Executive/Assembly needs to take into account the impact on business competitiveness (and jobs).
- Business needs predictability on future bills and plenty of time to plan ahead for any changes - it is important that the review's recommendations recognise the importance of this principle.
- There should be a fair distribution of the rates burden across business sectors.
- Wide ranging rate relief arrangements within the business rates system should be avoided - an expensive tax with lots of reliefs is a bad tax.
- Rating policy should encourage fair competition and not lead to distortions in competition - any departures from a "level playing field" between different types of business, or between different business behaviour, must be clearly and objectively justified.
- The impact of any significant changes proposed must be fully assessed on a sectoral basis.
We have used these principles to develop our considered response to the issues raised in the consultation paper.
9. For 2000/1 £307m was raised by the Regional Rate and £226m raised from District rates. Of this total £533m, business contributes £304m - 57% of the total. This contribution is significantly higher than in GB where the rate burden is more evenly shared between the domestic and non-domestic sectors - broadly 50:50. CBI members are concerned at the lack of transparency on how costs are incurred and the level of cross-subsidy which exists, including
- cross-subsidy by business re Water and Sewerage costs (companies already pay for water and sewerage disposal);
- cross-subsidy re Local Council rates - an assessment of the Local Council Rates would suggest that c38% of costs should be borne by non-domestic sector, although this sector is actually bearing c48% of the costs
There is a real danger that Northern Ireland will get flagged up as the region within the UK with the most inequitable distribution of rates, acting as an additional burden on the business sector. We also note that the Commercial sector is already paying rates marginally higher than in the rest of the UK - the Executive needs to ensure that this sector of the economy is not penalised further.
KEY NON-DOMESTIC ISSUES
Taxing Ownership instead of occupation
10. The CBI is opposed to changing the current system which is based on occupation. We see no substantive reasons for doing so while there are significant downsides and disadvantages which the paper highlights. In addition it would weaken the link between the rate payer and the public services provided (which should be to the benefit of the occupier) and it would also result in another wealth tax.
11. We see no reason for having a different system from that which applies in the rest of the UK.
Using Capital Value rather than Rental Value
12. The CBI does not see any need to move away from the current system based on the rental value. The capital value is generally captured reasonably well in the rental value. Changing to a capital value system would be more difficult as there are much fewer capital values to compare compared to rental values. Again we see no strong arguments to change from the system that currently applies throughout the UK - any changes would be expensive and of little, if any, value. Furthermore, as the paper states, the existing system works well.
13. We strongly oppose any change to the current system.
14. We support amendments to the legislation to overcome shortcomings in informing the RCA when occupation is taken up.
15. There are mixed views within the business community on the benefits and disadvantages of rating vacant property. While on the one side there are those that argue that the situation is no different from the rest of the UK (and hence rates at some reduced level should apply) to those that argue that there would be a negative impact on development and the risks, and costs of development, would increase.
16. We do believe there is an essential need to more fully understand the impact of any changes in this area and indeed to get a better understanding of the nature of the vacant property which exists. This assessment should take into account:
- The impact on the property market and values (- it is clear that many companies will reduce their holdings of vacant property - this will influence market values in the short/medium term and potentially impact on the value of local pension funds).
- The impact on speculative building and development - there is significant risk that speculative building work will decline. Vacant property provides no benefit to the owners but can incur considerable expense eg insurance, maintenance, etc.
- The costs of building and subsequent rental costs.
- The impact on the ability of companies to grow ie will this reduce their flexibility due to the desire to reduce their property holdings?
- Rural impact - the development of space for start-ups and the value of property in rural areas could be disproportionately affected (due to the limited market demand with resale values often less than building cost).
- The condition of buildings - for properties in a poor condition the imposition of rates may lead to further degradation and dereliction, so as to make them not fit for purpose (and hence not rateable).
17. We recognise that rating of vacant property will also weaken the link between rates and the provision of services - although the rating of vacant property should not exceed 50% of the full rating value. It is also unclear how such a policy on its own will assist in regenerating rundown town centres, although property owners will clearly be "incentivised" to find new tenants. The administrative difficulties in trying to identify "areas where demand for property is low and the market sluggish" (Para 87) may be significant and potentially expensive.
18. Overall the CBI has concluded that while there may be a significant short-term impact on the property market there is no clear rationale for a different position than that which pertains in the rest of the UK. Some caution is required with regard to timing of changes and phasing arrangements, in order to ensure that risks and any negative consequences are minimised. Any changes to the current position must have a sufficient lead-in time in order to reduce the negative impacts.
19. In September 2001 the CBI published a policy paper on Industrial De-Rating. This is attached to this response and it is also available on the CBI website (). This paper concluded that industrial de-rating should be continued until 2010 with the principle rationale being that that Northern Ireland manufacturers face significantly higher costs than their competitors in GB and further afield. The loss of de-rating will add to business costs, reduce profits, reduce the amount of funds available for reinvestment and lead to job losses.
20. The CBI September 2001 paper also makes the following points:
- manufacturing matters - there is a need to maintain a balanced economy including a strong and dynamic manufacturing sector;
- a significant number of jobs in the service sector depend on manufacturing - we estimate that 40% of private sector employment is dependant on the industrial sector;
- industrial de-rating is one of the few benefits which Northern Ireland offers to offset an attractive investment regime in the ROI;
- manufacturers face particularly high costs and risks relative to the rest of the UK, and elsewhere in Europe, in a range of key areas including:
- energy costs are significantly higher - In 2001/2 industrial users paid an additional premium of £40m in generating costs alone compared to what they would pay if based in GB;
- transport costs - additional costs of importation of raw materials and supplies and distribution of goods to export markets - two thirds of manufactured goods are transported outside of Northern Ireland;
- environmental costs - high water costs and waste management costs, combined with lack of recycling facilities;
- insurance costs, and particularly Employers Liability Insurance as a result of the "claims culture" which prevails in Northern Ireland.
- Many of the advantages that companies have traditionally benefited from are reducing - with a less attractive labour market (and particular concerns re lack of relevant skills) and increasing property costs.
21. This CBI paper also stressed that any changes to industrial de-rating need to be reviewed as part of a broader assessment of taxation policy especially vis a vis the ROI and the impact on Northern Ireland's international competitiveness. We do recognise that the rationale is likely to weaken around 2010 as the full impact of electricity contracts unwind and the Executive will have had time to implement policies to reduce other current excessive burdens on the business community. In some cases, eg in energy it was the Treasury that gained substantially at the expense of consumers due to the structure of the privatisation and the nature of the long-term contracts.
22. Since last September the industrial sector has been under significant strain. Weak international markets and intensifying competitive pressures, increasing costs of insurance, and from April 2003 an increase in National Insurance costs, have resulted in a further reduction in profit margins, weak investment intentions and a loss of jobs.
CBI Survey on Industrial De-Rating
23. As part of the process for developing a CBI response to the current consultation process we undertook a survey of manufacturing companies who currently benefit from the de-rating regime. The findings of the survey provide a reasonable estimate (based on responses from 73 companies employing over 36,700 people) on how companies will respond if de-rating is removed. The results of this survey are shown in Appendix I. Key points from this survey are summarised in the following paragraphs.
24. Companies were asked to identify how they would respond to the imposition of rates.
- Over 49% of companies indicated that there would be a significant reduction in employment.
- 63% indicated a significant reduction in capital expenditure.
- 39% indicated a significant reduction in Research and Development expenditure.
- 77% indicated that they would have to absorb the costs with only 15% suggesting that they would be able to pass some of the costs on.
- 44% would put significant pressure on their supply chain to reduce costs.
- 8% of companies believe they would not be viable and another 56% believed their viability would be under serious threat - only 7% believe there would be no impact.
25. While these results are startling they reflect the impact of a significant additional cost burden on their businesses. In terms of profitability the survey showed that the rating burden will be significant for a large number of companies.
- For 5% of companies it will exceed 100% of profits
- For 19% of companies it will be between 50% and 100% of profits
- For 20% of companies it will be between 20% and 50% of profits.
Rating costs will be less than 10% of profits for 34 % of companies. This clearly indicates that the financial return that companies need to secure on their investments will be significantly reduced for a very large number of companies.
26. These results contradict the DTZ Report (see section below) which concluded, erroneously, that the rates burden would be less than 3% of profits. Other studies, quoted by DTZ support the CBI findings. We believe we have a much better understanding of the impact of the imposition of rating on the industrial sector than DTZ.
27. To get a better understanding of the key factors that influence investment decisions the respondents were invited to identify the factors of most importance to them.
- Having the lowest cost base is considered to be the most important factor - 54% of respondents identified this factor as being very important (and a further 35% as important)
- The availability of skilled labour was the second most important factor - identified by 42% of respondents as very important and a further 49% as important.
- Access to markets was considered more important than access to suppliers
- Grants were considered to be very important to 24% of respondents.
28. Finally the survey sought to establish the typical business planning cycle for a significant capital investment. The survey findings show:
- 19.1% of companies have cycles greater than 4 years
- 28.8% for 3-4 years
- 30.1% for 2-3 years and
- 22.0% for less than 2 years.
This indicates that companies need to be given a lengthy warning of any significant change in the environment in which they are working. Again these findings undermine the DTZ assumption that most companies have a typical planning cycle of 2/3 years.
DTZ Report on Industrial De-rating
29. We have reviewed the DTZ Pieda report "The Economic Impact of De-Rating" prepared for the Rating Review Steering Group. We have major concerns about key aspects of this report which we have set out in Appendix II. Some key concerns are set out below
- poor assumptions and inconsistencies within the report.
- incorrect conclusions.
- The survey has a particular focus on very small companies - only 24 companies employing 56 or more people were surveyed, yet it is these companies that are most exposed to international competition.
- There is no sectoral assessment, yet there will be significant implications for certain manufacturing sectors.
- The conclusions regarding the impact of rates on profitability are misleading, and inaccurate. This undermines the conclusions reached in the report.
- They fail to understand that it is the whole cost package, rather than one particular item that will influence investment decisions.
- DTZ are incorrect in their assumptions regarding typical business planning cycles.
We believe the findings of the DTZ Report should be treated extremely cautiously. Their conclusion that "the overall effect on the level of economic activity in the medium term would be negligible" is misleading - significant implications for the manufacturing sector are ignored and no evidence is put forward to how increased (public) expenditure elsewhere will benefit the economy, and in particular the manufacturing sector.
30. Clearly the removal of de-rating will impact on companies in different ways. But it will have particular impacts on certain sectors - with some sectors more exposed than others.
Agri- food sector
- a major employer across Northern Ireland providing opportunities for adding-value to local agricultural output;
- sector operates with low profit margins, and is very exposed to increasing costs;
- over 50% of survey respondents indicate that significant additional pressure would be applied to reduce supply (raw material) costs eg the agricultural sector which is already in difficulties;
- sector increasingly dependent on large multiples and thus lacks pricing power;
- rural areas will be most exposed to company closures, with disproportionate impact on specific locations;
- sector needs to increase profitability in order to invest in innovation and higher value products.
- sector continues to be particularly vulnerable to low cost international competition;
- a further increase in cost base will exacerbate the situation and lead to more offshore sourcing;
- the CBI survey reveals that this sector is most at risk of further job losses if de-rating is removed;
- sector needs to improve profitability to invest in design, branding and specialised products.
- sector is large energy user which together with other costs make Northern Ireland an expensive location;
- high export orientation with tough competition from both the rest of the UK and around the world;
- sector faces more difficult labour market with higher training costs than it has traditionally had to deal with;
- certain subsectors, including polymers/plastics, and electronic assembly are highly vulnerable to increased costs;
- many multinationals concerned that higher cost base is making Northern Ireland less attractive for future investment - higher costs result in less attractive financial returns relative to investment in other locations.
31. We have also set out in Appendix III a number of quotations from business executives to give a better feel for the impact of removing de-rating.
32. Having taken all the factors into consideration we have concluded that the position we set out in September 2001 remains sensible resulting in the least damage to the Northern Ireland industrial base and economy overall:
- industrial de-rating should continue until 2010 - a lengthy lead in period is critical to minimise the negative impact of this additional cost burden;
- during this period the Executive must take appropriate measures to reduce the high cost of doing business in Northern Ireland;
- a phasing in of rates beyond 2010 provided that a more competitive environment has been created.
33. As we have set out in Para 8 as a matter of principle we do not believe there should be wide ranging reliefs. We are conscious that across Northern Ireland there are many small towns and villages with a dependency on a single large employer - thus making the area highly vulnerable to any significant market or cost base changes. Many of these employers are in the traditional manufacturing sectors of clothing/textiles and food processing. The removal of industrial de-rating would clearly impact on these companies and the local communities.
34. There is a danger that the introduction of additional reliefs will distort competition. As stated elsewhere (para 37) we believe other more targeted measures and support should be used to support enterprises. For companies facing particular difficulties we do believe the introduction of hardship relief should be considered - this might be the most appropriate way of addressing this issue.
35. An expensive tax with lots of reliefs is a bad tax. Our preference is to move to a situation where there are fewer reliefs and not to a situation where there are more reliefs. The current reliefs need to be reviewed to assess whether they are justified. In some cases such as in public sector leisure centres it is not clear why the public sector does not pay rates while the private sector does pay rates. Surely the cost of these facilities should be paid for by the people in the Council area who benefit from their existence. There are increasing complaints about charity shops which benefit from relief and the impact this is having on town centres and distorting local markets.
36. With regards to freight transport relief our primary concern is to ensure that Northern Ireland ports remain competitive and provide the lowest possible charges. Any increase in their costs will inevitably be passed on to industry and consumers generally in higher charges on the movement of raw materials, finished products and people. This is therefore one relief which the CBI believes should remain.
Reliefs for Small Business
37. As we have set out in Para 9 we do not believe there should be wide ranging reliefs. With regard to whether small firms should be given relief we have concluded that a substantive case has not been made with regards the provision of reliefs for small companies. A review of this issue must take into account the following points:
- the majority of very small businesses tend not to grow and are less internationally exposed
- survival rates for small businesses in Northern Ireland are the highest of any region in the UK - our problems stem from not having enough start-up businesses in the first place
- rate relief is a blunt instrument to support growing small firms - there are other more effective measures and support available that should be used to assist small firms
- there is evidence to indicate that rate reductions/reliefs will be offset by increased rental - small firms may be more exposed here
- with rate reliefs, growing businesses would have additional barriers once they achieved a certain size.
38. If the decision is taken to provide small firm relief it is essential that this is funded by the Executive and not be an additional burden on other rate payers. In addition support relief needs to be simple and should apply automatically rather than requiring an application to be made.
39. In principle we would support having some form of hardship relief. This is preferable to a range of other reliefs. This should be only used in exceptional circumstances and preferably be time limited.
40. One issue which is not raised in the consultation document is the issue of change of circumstances. We believe that an Appeal based on "material change in circumstances" should be introduced - this is available elsewhere in the UK and it seems inequitable that Northern Ireland occupiers do not have this ability to appeal their valuation.
41. It is also important to stress the importance of ensuring adequate transitional relief is available following revaluations, in order to minimise the damaging consequences of sharp increases in rate bills. There must also be a commitment to undertaking regular revaluations - at periods of no longer than 5 years. This will help to reduce the amount of transitional relief required.
42. We also believe that interest should be payable on refunded rates where they have been successfully appealed - this is not the case at present and is clearly unfair and an additional unjustified burden on business.
Funding Water and Sewerage Services
43. CBI Northern Ireland believes the charging regime must be transparent, fair and affordable and that cross-subsidisation across consumer groups must be avoided. The current regime for some customers of paying via regional rates and metering is unsatisfactory.
44. We note that the consultation document in Para 126-128 does not consider the use of water metering. We believe this is extremely short-sighted. The analysis is particular weak and the assumptions incorrect. For instance:
- water metering is common place in GB and other countries - within England and Wales over 20% of households are now metered. The Regulator, Ofwat, states that metering is the fairest method of charging for water
- water metering need not be expensive, especially when implemented on new properties or where maintenance work is being undertaken (in Northern Ireland it is estimated that some 30% additional homes will be constructed over the next 25 years)
- it ignores the potential of new technology in terms of setting up metering systems and monitoring them.
45. We believe there should be immediate steps to increase visibility and transparency - as a first step water and sewerage charges could be shown separately in the rates bill with information on how the money is spent. We believe the charging should be cost-reflective - a contribution based on NAV rather than a uniform contribution per household would therefore be preferable. Whilst it is desirable to have separate billing it may not be cost effective to introduce - a detailed assessment of the value and cost of introducing separate billing is required. We would encourage and facilitate the use of metering particularly in "new build" but provide (domestic) customers with the choice of metering or paying on the basis of rateable value. It may also be appropriate to offer low occupancy rebates eg to single pensioners.
46. In terms of sustainability, metering would provide important incentives to reduce water usage and improve water efficiency. We believe a charging strategy should involve water metering - though we accept there should not be universal metering.
Appendix I Summary of CBI Survey into Impact of the removal of De-rating
Appendix II Comments on DTZ Report Economic Impact of De-Rating
Appendix III A selection of quotations re the impact of losing Industrial de-rating
CBI Northern Ireland is grateful for the assistance of Northern Ireland Food and Drink Association, the Northern Ireland Textiles and Apparel Association and the Northern Ireland Polymers Association in distributing the survey. We are also grateful of the support of Ernst and Young who provided a secondee to assist in the development of this response.
CBI SURVEY ON IMPACT OF THE REMOVAL OF INDUSTRIAL DE-RATING
The postal survey was undertaken in August 2002 targeted at CBI members and members of a number of trade associations. There were 73 responses (a response rate of over 30%) to the survey covering 36,698 employees. The results are as follows:-
COMPANIES WERE ASKED TO LIST THEIR SECTOR AND NUMBER OF EMPLOYEES
No of Firms
No of Employees
COMPANIES WERE ASKED WHAT WILL YOUR ANNUAL RATING BILL BE IF DE-RATING IS ABOLISHED?
Rating Bill (£)
No of Firms
Less than 20,000
20,000 - 50,000
50,000 - 100,000
100,000 - 200,000
200,000 - 500,000
500,000 - 1,000,000
COMPANIES WERE ASKED TO IDENTIFY (APPROXIMATELY) WHAT PERCENTAGE OF PROFITS WILL THEIR RATES BILL WILL BE?
% of Profits
No of Firms
As % of respondents
50% - 100%
20% - 50%
10% - 20%
Less than 10%
n/a or did not respond
An analysis of companies that did not complete this section reveals that several of them are not making profits at present (and thus could not respond to the question) - some others appear not to have responded for confidentiality reasons. Figures quoted in the text are based on those companies that responded.
COMPANIES WERE ASKED TO ASSESS WHAT WILL BE THE IMPACT ON THEIR BUSINESS IF INDUSTRIAL DE-RATING IS ABOLISHED?
Research & Development
Pass all costs on
Pass some costs on
Pass no costs on - cost absorbed
Ability to pass costs on to customers
Significant pressure on supply base
Some additional pressure on supply base
Seek to reduce supply base
Company will not survive
Viability of Business
IN DECIDING TO INVEST IN NORTHERN IRELAND COMPANIES WERE ASKED TO IDENTIFY THE IMPORTANT FACTORS INFLUENCING THEIR DECISION
Availability of skilled labour
Access to markets
Access to suppliers
Lowest cost base
COMPANIES WERE ASKED TO CONSIDER THAT WHEN MAKING A SIGNIFICANT CAPITAL INVESTMENT IN THEIR BUSINESS, WHAT IS THE TYPICAL BUSINESS PLANNING CYCLE USED?
No of Firms
Less than 2 years
Greater than 4 years
CBI COMMENTS ON DTZ REPORT ECONOMIC IMPACT OF DE-RATING
The Rating Review Steering Committee commissioned DTZ Pieda to review the system of industrial de-rating, including an evaluation of the impact of de-rating on the Northern Ireland economy.
We have carefully considered the report's findings which give rise to considerable concerns - in regards the assumptions underpinning the report, inconsistencies within the report and incorrect conclusions. Some of the conclusions emerging from the survey are highly questionable. Furthermore the report fails to undertake a sectoral analysis which we believe is essential as clearly some sectors will be impacted more significantly than others.
We have set out below our primary concerns.
3.11 The report recognises that electricity prices as a cost are considerably higher than in the UK. Para 3.11 suggest a maximum of 25% differential in electricity prices with GB. CBI evidence suggests for most larger manufacturing plants the current differential is higher than this - for smaller companies the 25% figure is correct).
The Survey Sample
5.2 The sample size is particularly poor, 0.25% of 3,800 manufacturing companies in Northern Ireland leading to 100 companies surveyed. In an effort to take in the geographical factors the sample did not concentrate on the geographic placement of manufacturing, but on council areas. Significant areas of manufacturing in Belfast and Craigavon only saw 18 companies surveyed.
Only 22 companies in the survey employed more than 50 people - yet it is likely that this group will pay around 80% of the total rating bill and the impact on the economy will be most pronounced depending on the impact on these companies.
5.10-5.11 The survey sample found that "the imposition of rates would add a sum equal to 0.5% of turnover and just under 3% of profits". This is, as a minimum, misleading and more likely, to be inaccurate. It reinforces concerns about the nature of the sample. With all categories of turnover, other than the "Over £5m" reporting rates as a percentage of profits at between 7.4% and 45% the conclusion reached is to put it mildly surprising.
In para 5.14 reference is made to the IFF study which found that rates represented about 20% of profits - but this is ignored. Recent CBI evidence supports the IFF figures but also reveals that many companies will be disproportionately impacted.
5.17 DTZ notes that locally owned companies "compete primarily with other businesses located in Northern Ireland". Yet 99% of sales of large foreign owner companies and 77% of sales of large indigenous companies were external sales (£7.1 bn.). Representation from these companies was particularly weak in the sample. The focus on small companies (over 50% of sample employed less than 20 people) in the survey fails to recognise the increasing importance of competition and its impact on growing SMEs.
5.24 "Among the externally owned firms, none stated that they would not have opened in Northern Ireland without de-rating, while 55% would have opened and 45% did not know."
Inward investors look at the entire package of costs and not one individual item - it is the total cost of doing business that matters (as the CBI survey has shown), so it is not surprising that when asked about one item it is not considered critical in its own right.
5.26 "Imposition of rates would impose a relatively small burden on most businesses in Northern Ireland." - this fails to understand the global pressures and the need to have a low cost base. We also believe it is inaccurate - as we highlighted above it raises serious questions regarding the findings of their survey. While clearly for some companies this is true we have extensive evidence to suggest that the removal of de-rating will amount to a major burden and in many cases make the current business unviable. Evidence collected by DTZ indicated that 20% of companies who knew the size of their rating bill would close - this seems to be ignored.
6.12 The report fails to recognise that selective financial assistance has been decreasing sharply in recent years, and continues to do so. The value of industrial de-rating is thus an increasingly important part of the overall incentive package.
6.17 Equating the impact as increase of costs against turnover (0.5%) is a meaningless statistic. This does not take into account the profit levels made by any business, the company cost base, or the demands placed on the business by shareholders or markets operated in. The implication that 0.5% of turnover is not significant totally fails to understand the global competitive pressures that companies are operating within and the choices an increasing number of companies have for relocation. Companies will seek to maximise their Return on Capital Employed (ROCE), assuming that the risks associated with the investment are the same.
There is no strong possibility that industrial rents will fall as suggested in the report. This is due to the nature of lease agreements which according to the report some 59% of premises are owned. Many of the 41% of the companies sampled who rent their premises are likely to be smaller businesses - 82% of very small businesses in the survey rent. Furthermore TSN areas will suffer more due to the higher level of property which is owner occupied (68%).
6.18 The report overall appears to dismiss the fact that a significant number of companies will face rate bills which are a significant percentage of profits - indeed 3 out of 15 companies surveyed by DTZ reported they would close (para 5.20)- that is 20% - this startling finding appears to be discounted.
6.19 The report concludes that "the most adverse impacts would be likely to be on very small firms". We disagree - CBI evidence suggests that it will be companies (both large and small) operating in traditional industries (particularly food and clothing, but also other sub-sectors eg plastics, electronic assembly operations) which will be effected the most - these tend to be low margin businesses operating in intensely competitive markets. We are very surprised that the report did not undertake a sectoral impact assessment.
6.20 "The overall effect on the level of economic activity in the medium term will be negligible" - the evidence does not support this. There will be significant impact in key sectors, some of which have a particular geographic concentration. No evidence is put forward on how using the funds raised by removing de-rating would offset the impacts on the manufacturing base and the associated companies who provide services to it.
6.21 The report concludes that "the clearest potential benefit appears to the possible value of de-rating as an inward investment incentive" - this fails to recognise the increasing mobility of indigenous companies and the increasing tendency to outsource manufacturing activities. Increasing the Northern Ireland cost base further will only lead to an increase in this activity and a consequent loss of jobs. It also fails to take into account the general downward trend in selective assistance seen in recent years.
6.26 The report concludes that typical planning cycles are 2-3 years. For small firms and for companies operating in the technology focused sectors this may be true. But for many companies the typical business cycle for large investments is longer than this period.
The recent CBI survey found that over 48% of companies have typical planning cycles of 3-4 years or more.
Factors not considered by DTZ Report
- The report points out that the revenue forgone is estimated at £64m - but this could be misleading. On the one hand industrial NAVs have never been challenged and thus are likely to be high. On the other currently, currently the plant and machinery element of valuations is very low but if rates were actually being paid on these valuations, this may result in higher valuations than at present - companies have noted that those with high energy usage (ie with extensive machinery and equipment) have higher NAVs.
- The report did not take account of any multiplier effect between companies/sectors of the withdrawal of industrial de rating or additional burden created by the closure of any companies by the imposition of charging industrial rates. For example we believe the food sector will be one of the sectors most at risk - and there will be impacts on the supply side (ie the farming sector).
- The report recognises but discounts the fact that not all industrial property can be rented. Indeed it ignores the fact that in the majority of rental agreements, including industrial premises, there will be upward only rental review clauses.
- Manufacturing will locate in those locations that will result in the lowest manufactured cost into an internal or the external market. This is an increasing trend, and will accelerate further with EU enlargement.
- A substantial amount of our larger employers have shareholders outside Northern Ireland. Profits are important - if they don't exist the companies will not invest and will not survive. But it is relative profitability which is key when investors have choices regarding where they make their investments - a focus on Return on Capital Employed (ROCE) is more appropriate. Companies that invest many tens of millions in their operations need to achieve significant profits to achieve their investment return. This will reinforce the need to have the lowest cost base.
A SELECTION OF QUOTATIONS RE THE IMPACT OF LOSING INDUSTRIAL DE-RATING
In responding to the CBI survey a range of comments were volunteered by survey participants. A selection of these are highlighted below:
"As part of an international group already under serious threat due to profitability - the additional cost of this .. would almost certainly result in closure."
"This would on top of transport, economic, insurance and government bureaucracy be suicidal for NI manufacturers."
"The company has undertaken research into the viability of transferring significant production to Germany (mainly to be closer to raw material and European customers, representing over 30% turnover). We are sitting on offers of assistance from local authorities. Changes to current rating policy may well accelerate final decision to move!"
"This could possibly be the last straw - I would seriously consider closing as I do not see any future in manufacturing in the UK."
"Manufacturing plants around the world compete as lowest cost into the market. By adding cost we may lose volume to sister plants with a lower cost."
"As rate saving is built into our cost structure any increase would have to be absorbed. This will lead to NI being uncompetitive in the group."
"Rising costs will force us to consider outsourcing to Eastern Europe, India, Far East where costs are lower."
"May consider re-locating the manufacturing activity."
"Ridiculous to attack manufacturing activity at a time when it is in decline."
"Will consider re-location outside Northern Ireland."
"Rating is another form of tax, therefore, pressure to relocate to low tax areas such as ROI would increase."
"If reintroduced, and no cost saving (on power etc) to balance it, we will be lucky not to be forced to close."
"The additional cost impact onus of the overheads mentioned above make trading very difficult. The impact of de-rating would be unsustainable."
"This could be one of the most serious mistakes made by politicians with respect to this individual sector."
13 September 2002
PAPER NI 17 01
INDUSTRIAL DE-RATING - BRIEFING PAPER
1. 100% derating of industrial plant was introduced in the early 1980s in response to the deteriorating competitive position of the sector and the erosion of the manufacturing base, and difficulties in attracting inward investment. A review of de-rating was undertaken in 1992 which we understand concluded that the rationale for providing de-rating remained, partly to counter-balance higher energy and transport costs and to assess the impact of new water and trade effluent charges. Industrial sites will pay rates on their office premises, if above a certain size. Commercial rates in the Province are in line with Great Britain.
2. The Programme for Government, launched in March 2001, committed to undertaking the following:
" by May 2002 complete a review of rating policy, taking into account issues relating to equality of opportunity and new TSN, so as to have any relevant legislation in place to implement any policy changes by April 2003"
An Interdepartmental Review Group was established in July and they have since agreed to set up a separate but linked review of Industrial De-rating. This paper sets out CBI's views on the importance of maintaining a strong and dynamic manufacturing and industrial sector in Northern Ireland and the rationale for maintaining de-rating at least until 2010.
WHY DOES MANUFACTURING MATTER?
3. De-rating for industrial operations applies to factories, quarries, mines and manufacturing processes and is determined by the Valuation and Lands Agency (VLA) under Schedule 7 of The Rates (NI) Order 1997. Direct employment in these sectors is considerable:
Quarries and mines 1,850
(Figures March 2001)
4. This is some 24 % of total private sector employment. However a considerable number of people are employed in the service sector who are totally dependent on the manufacturing and production industries. In fact security, cleaning, logistics and other outsourced service sector jobs would previously have been counted in the manufacturing statistics. The traditional boundaries and definitions of manufacturing are constantly changing. The CBI estimates that for every 1000 people employed in manufacturing at least 500 people are employed in the service sector. This would indicate that almost 40% of private sector employment is dependant on the industrial sector of the economy.
5. Manufacturing is important to the economy. It is the key contributor to our traded goods and services - of course this means that it is the sector most exposed to competitive pressures from other regions and countries. Northern Ireland cannot survive on service provision alone. It must remain a mixed economy with a strong base of manufacturing and productive industries. However manufacturing will have to change - even faster than it has done over the last decade. Increasing developments in e-commerce and a constant drive for greater value-added in terms of innovation, product development and customer service are all changing the nature of manufacturing.
6. Global competitive pressures are intense and the introduction of the Euro is leading to higher levels of transparency and intensely competitive conditions across the European Single Market. These pressures apply just as much to the high technology sectors as they do to our more traditional sectors. At the same time liberalisation of key services across Europe eg energy markets, is leading to lower costs for our competitors.
"The greater price-transparency resulting from EMU will require Northern Ireland to become more competitive"
(Pg xvi NIEC Report, Regional Economic and Policy Impacts of EMU, 1998)
7. Relative to the rest of the UK the Northern Ireland manufacturing base has performed well in the last 5 years. However employment has fallen by around 4000 people from over 107,600 in 1997. While there are encouraging indications that a transition to become a more innovative, knowledge-based economy is underway, there are significant structural weaknesses within the industrial sector, including a disproportionately high percentage of people employed in low value-added (and generally lower profit) sectors.
8. Profit margins are under intense pressure across the manufacturing base, made worse by the strength of sterling against the Euro. The Office of National Statistics (July 2001) reveals that manufacturing companies rate of return fell to 3.7% in Q1 2001 - the lowest quarterly figure recorded since 1992 while annual returns have dropped sharply since 1995.
9. There are no specific figures available for Northern Ireland for the industrial sector. However DARD has undertaken an assessment for the food and drink sector (employing around 19,000) with figures showing that between 1989 and 1998:
- profit margins steadily decreased throughout the 10 year period from 4.1% to 2.0%
- rate of return on capital employed decreased from 17.1% to 6.9%
10. CBI survey evidence indicates that long-term investment intentions remain weak. We do not have regional estimates but the CBI forecasts that manufacturing investment will fall 5% this year and a further 3.9% in 2002. These trends do not bode well for UK manufacturing.
11. Northern Ireland needs to provide a competitive base to sustain and develop the existing manufacturing and productive industries base and to offer an attractive platform to attract inward investment - industrial de-rating is an important part of the incentive package. The CBI is concerned that the competitiveness of the environment necessary to develop a dynamic, high value-added manufacturing base is already being undermined - and the removal or reduction of 100% industrial de-rating will provide a further major blow leading to the weakening of the industrial base across Northern Ireland and the service sector jobs that rely on it.
12. In addition to assessing the competitive position with the rest of the UK it is vital that account is taken of the situation in the Republic of Ireland (ROI). A very attractive fiscal regime is a major incentive, and clearly outweighs the modest rating costs across the entire business sector. Overall property taxes in the ROI are low (0.4% of GDP) compared to GB (1.9% of GDP). Indeed local authority rates raised c£330m in the ROI (1999) compared to £304m in Northern Ireland. Combined with lower energy costs and transport costs, a more technically focused education system, and critical mass in key manufacturing sectors, the ROI poses a significant threat to Northern Ireland's ability to attract and encourage higher levels of manufacturing investment.
IS THERE STILL A RATIONALE FOR MAINTAINING 100% INDUSTRIAL DE-RATING?
13. Our assessment of the evidence clearly shows that the manufacturing sector bares significant additional costs relative to the rest of the UK and companies are in an increasingly uncompetitive position relative to their counterparts in the ROI, and many other European countries. The advantages that many Northern Ireland manufacturing plants had access to in the 1980s and early 1990s no longer exist, particularly regarding the labour market and property costs. In the following paragraphs we highlight the key issues.
14. Northern Ireland companies, particularly in the industrial sector face high costs relative to the rest of the UK in a range of key areas:
- energy costs (especially electricity) are the highest in Europe. Indeed the problems in this area are caused by long term contracts in place until 2010 from which the Treasury benefited by securing inflated prices for generating plant linked to long term contracts. Work for Ofreg by London Economics in 1997 estimated that the costs of generation were 43% higher than in GB, while the Regulator stated in June 2001 that the unit cost of availability is still about twice what customers should be paying for modern competitive generation.
What does this mean to industrial consumers? For example in the current year:
- a Lurgan (c100 employee) company's electricity bill is £500,000 more than a similar plant in GB (where 23 suppliers are offering to supply compared to 2 in Northern Ireland);
- a large Londonderry manufacturing plant faces an electricity price premium in Northern Ireland of between 25% and 100% with its different European competitors;
- a Co Antrim based company faces electricity costs 60% above comparable plants in GB;
- a major food manufacturer has electricity costs which are between 39% and 59% more than comparable sites in GB.
Northern Ireland is unduly exposed to high fuel costs - this exposure presents higher risks for the manufacturing sector and particularly to energy intensive plants. For example electricity prices in 2001/2 increased by over 20% for many industrial customers in Northern Ireland against no or very modest increases in GB. Liberalisation in Europe means that prices are still on a downward trend.
While overall comparisons with GB are difficult our best estimate is that current prices for industrial consumers are in the order of 30% more than in GB (Based on latest published Electricity Association figures (Jan 2000) and taking into account the reduction in prices in April '00 and the increases in April '01). Total generating costs are in the order of c£340m in 2000/01. With industrial users accounting for 40-45% of this total, that is around £135m, this means that they are paying an additional premium of £40 million per year in generating costs alone compared to what they would pay if based in GB.
We have an emerging natural gas market but it is currently geographically limited thereby restricting choice to many customers.
- transport costs - high fuel costs, combined with the costs of crossing the Irish Sea, impact on the cost of importing raw materials and components and add to the cost of distribution of goods to export markets. Additional costs are also incurred through air fares by sales/marketing staff and indeed from suppliers who service and maintain specialised capital equipment. Northern Ireland companies are faced with some of the highest transport costs in the UK. For example
- extra transport costs make the costs of printing paper 6% higher in Northern Ireland than in GB, and there are additional costs of exporting finished product back to GB;
- in the agri-food industry feed costs are c8% higher in Northern Ireland than in GB due to the additional transport and handling costs involved - eg this adds an additional £2 million to the costs of feed for a major food processing company;
- Clothing/textiles - we estimate additional import costs of up to 3% and export costs of 1% due to Northern Ireland's peripherality;
- Engineering - higher added value means that transport costs are less of a burden than in other sectors - even so, additional transport costs are estimated to be in the order of 1.5-2.0% for imports and for exports.
Transport costs are high relative to the rest of Europe largely as a result of high fuel costs and Vehicle Excise Duty. Running a fleet of trucks in the UK is over 25% more expensive than running the same fleet in the ROI - this will naturally be reflected in higher haulage rates which manufacturers have to face.
- insurance costs - companies across all industrial sectors face substantially higher insurance costs than their counterparts in GB, largely due to the frequency of claims (180% higher in NI). This is of concern considering that major accident rates in Northern Ireland are less than in GB eg latest figures available indicate that in 1997/8 accidents reportable under Riddor were 65.8 per 100,000 employees in Northern Ireland compared to 126.7/100,000 in GB.
Typical Insurance Rate Comparisons (as a percentage of Wage Costs) are as follows:
Sector GB NI
Light Engineering 1.50 3.75
Electronics 1.00-1.10 2.00-2.20
Food (processing) 2.25 3.00
- water costs - Northern Ireland companies pay costs which are in the highest quartile in the UK. The business sector pays a disproportionately high cost for its water relative to the cost allocated to the domestic sector (NB domestic sector does not pay separate water rates).
- water charges in Northern Ireland in 1997/8 were 68p/m3 against an England & Wales average of 65.8p/m3 and Scottish average of 48.8p/m3
- waste disposal costs are significantly higher than in Great Britain and the principle of polluter pays is fully applied to the industrial sector. Certain wastes have to be transported across to GB incurring additional costs.
- an expensive monopoly at Dargan Road has developed as a site for waste disposal. Costs of disposal of £28/tonne compare with £20-22/tonne for Scotland and most of the northern half of England. (Prices ex-tax);
- certain wastes in the food sector have to be sent to GB for disposal incurring additional costs;
- lack of recycling capabilities in Northern Ireland (largely due to scale and peripherality) result in much higher waste costs for some manufacturing sectors eg in GB the waste material from printing companies is purchased from manufacturers while in Northern Ireland there is a cost to disposal due to lack of recycling facilities
- Northern Ireland has no long-term provision for special wastes.
15. Over the last 10 years some of the offsetting advantages of being located in Northern Ireland have considerably reduced. Such areas include the following:
- a much less attractive labour market. High unemployment and a ready supply of labour were key features of the 1980s and early 1990s. However there has been a dramatic reduction in unemployment during the 1990s and a considerable tightening of the labour market in recent years. Companies have had to face:
- increasing difficulties of recruiting and retaining suitable labour;
- higher levels of staff turnover( and associated costs);
- higher training costs as the critical mass of skilled and semi-skilled workers available has reduced or in some cases does not exist (eg in semi-conductor industries);
- high costs of attracting professional and technical staff - there is evidence that some companies are having to pay a premium to attract specialist staff to Northern Ireland.
PricewaterhouseCoopers report that
"Our own survey work suggests that recruitment difficulties are significant particularly for larger manufacturing firms and that this creates additional costs for business"
(Northern Ireland Economic Review & Prospects June 2001)
Pay rates across the main manufacturing sectors remain broadly in line with the rest of the UK - indeed in some sectors eg printing, clothing etc wage agreements are nationally based. Within the engineering sector the wage differential between Northern Ireland and GB for manual employees has reduced to less than 3% (from 7.3% in 1995).
- increasing property costs relative to the rest of the UK. Figures from the DTI Regional Competitiveness Indicators reveal that the gap in industrial property costs has been closing
Capital Value Index of Type 3 Industrial Property
1994 100 63.2
1995 100 69.9
1996 100 80.0
1997 100 86.4
1998 100 81.8
1999 100 92.2
(Source DTI Feb 2000)
- Taxation changes - the introduction of recent taxes such as the Climate Change Levy has increased the cost burden on the industrial sector. The proposed introduction of the Aggregates Tax in April 2002 will be a considerable blow to the quarrying sector in Northern Ireland which is particularly exposed to competition from the ROI - job losses are guaranteed as added-value processing is transferred to the ROI. Additional costs will only accelerate the shift in employment to the ROI and further weaken the sector.
16. CBI Northern Ireland believes that any changes to industrial de-rating need to be reviewed as part of broader assessment of taxation policy especially vis a vis Republic of Ireland and the impact on Northern Ireland's international competitiveness - this is particularly important for those sectors in the economy exposed to international trade and competition.
17. CBI strongly opposes any change to industrial de-rating in the short/medium term unless Northern Ireland can secure more tax incentives to encourage higher levels of investment and improved returns on investment in Northern Ireland. The rationale for maintaining 100% derating clearly remains although we recognise that the strength of the case is likely to weaken around 2010 as electricity contracts unwind. Reduction or removal of 100% de-rating will impact on Northern Ireland's competitiveness: it will add to business costs; reduce profits (by an average of 15-20% but in some cases by much more); reduce the amount of funds available for reinvestment and lead to job losses. Many existing companies across a range of sectors will not be in a position to survive these additional costs, while potential investors will face lower returns.
18. We believe the following key principles should apply to rating policy:
- Business rates are a tax and, as with all taxes, the Executive/Assembly needs to take into account the impact on business competitiveness.
- Business needs predictability on future bills and plenty of time to plan ahead for any changes - it is important that the review's recommendations recognise the importance of this principle.
- We support a fair distribution of the rates burden across business sectors.
- We are against wide ranging rate relief arrangements within the business rates system - an expensive tax with lots of reliefs is a bad tax.
- Rating policy should encourage fair competition and not lead to distortions in competition - departures from a "level playing field" between different types of business, or between different business behaviour, must be clearly and objectively justified.
- The impact of any significant changes proposed must be fully assessed on a sectoral basis.
19. We understand the desire of the Executive to address the infrastructure deficit - this is a major business concern. However the business community believes that the priority for the Executive is to improve the efficiency and effectiveness of existing expenditure (see CBI Northern Ireland Paper NI 10 00 Addressing Northern Ireland's Infrastructure Deficit) rather than focusing on increasing taxation and reducing Northern Ireland's ability to compete internationally.
14 September 2001
NORTHERN IRELAND GRAIN TRADE ASSOCIATION
7 August 2002
I write in response to the Consultation Paper on Rating Policy and attach our main observations and concerns.
The Northern Ireland Grain Trade Association represent feed milling and associated trades; our customer base would be in particular NI producers and farmers.
Our major concerns are as follows:
a. Our business is characterised by being highly capital intensive with in general relatively poor returns. Any increase in cost in our business will ultimately have to be borne by our customer base, who are in a particularly bad position to do so across all sectors.
b. Our business is unusual in a UK context in that we compete directly with feed producers from a different jurisdiction over a land border, over which there is a free movement of goods. We already find ourselves at a significant competitive disadvantage in particular with regard to electricity, fuel and taxation costs. Competing firms in our business in RoI enjoy very low levels of manufacturing taxation.
Because of the specific circumstances, which apply in our sector, as mentioned above we feel extremely strongly that the implementation of a rates charge at this time would be particularly inappropriate.
President of NIGTA
NORTHERN IRELAND GRAIN ASSOCIATION (NIGTA)
10 September 2002
1. NIGTA is delighted to see that support for agriculture and rural economies are a continuing objective in the Programme for Government.
2. NIGTA can demonstrate that the entire Northern Ireland farming structure is currently in danger of melt down due to much higher input costs in Northern Ireland coupled with much lower returns when compared with elsewhere in the UK.
3. Using Government supplied data NIGTA can demonstrate that 37% of farms have a negative net farm income rising to 63% having less than £10,000 per annum. Bank debt has risen to its highest ever level in excess of £550 million
4. The entire pig industry has operated below breakeven over the last four years, almost 50% of farmers exiting the business with a high proportion of the remaining 50% in danger of imminent collapse.
5. With almost 80% of the agricultural products produced being exported it is essential that we do not increase the cost penalties that are already becoming an unbearable burden.
6. Principal areas of high input costs disadvantage.
- Grain price disadvantage
- Energy price disadvantage
- Transport cost disadvantage
7. Principal areas of low output value
- Product price disadvantages.
8. NIGTA would propose a continuing rates exemption across all agricultural supply and processing premises until such times that the disadvantages with the rest of GB have been reduced to offer a level playing field.
Expansion on principal disadvantages
The Grain Price Disadvantage
This disadvantage costs the Northern Ireland agricultural community in excess of £10 million per year.
Northern Ireland is a grain deficient area and the differential between NI and GB has widened considerably over the last few years. Most livestock require a large quantity of grain in their diets with the poultry and pig industries utilising up to 60% grain in their diets.
Grain in Northern Ireland is 30% more expensive in Northern Ireland than in it's principal market place England. Companies such as Moy Park must overcome that penalty to export its produce. This is also true of every company whether they are major exporters or are simply competing with imports.
Almost 50% of animal feed produced in NI is for the intensive sectors of poultry and pigs. These sectors are seriously undermined by all three significant disadvantages. The total profitability of producers and processors in this area is under constant threat, and the possibility exists that on average they are loosing money at this time.
The Energy Cost disadvantage
All producers, processors and their suppliers face significant energy cost disadvantages. NIGTA does not have access to the costs associated with the elements outside their control, however the feed milling sector faces energy costs of approximately £5 million per annum. The disadvantage the industry must carry can be between 30% and 80% depending on the figures used. At 30% the compound feed industry carries a burden of £1.5 million, while the industry at large will carry a much higher figure.
The animal feed industry has a high level of energy demand. The cost disadvantage could equate to 1% of turnover as opposed to the 0.4% suggested in some reports.
The Transport Cost disadvantage
As 80% of everything the agricultural industry produces is exported from Northern Ireland, the costs associated with this disadvantage will be well known to Government and will run to many millions of £s. NIGTA does not have definitive analysis and therefore could not verify the actual amounts.
The Product Price disadvantage
It is demonstrated by Government figures that financial returns for principal farm products such as Milk, Beef and Pigs are all significantly below the GB price.
Reliance on exports and lack of competition for the products have combined to create values that can range between 5% and 20% lower than a GB equivalent.
An example of this is the pig industry where the value received would be £4 million higher per annum at average GB prices.
President of NIGTA
G E MCLARNON & SONS LTD
5 July 2002
With regard to the issue of INDUSTRIAL DE-RATING, we wish to submit the following evidence that this would possibly be the last nail in the coffin for the agri-food industry in Northern Ireland.
This contracting sector has suffered greatly during the 1990s and since then the collapse of the N.I. Pig Industry, Foot and Mouth Disease, BSE, the recent sharp fall in milk prices and the increasing levels of imported meat products have all combined to squeeze and indeed eliminate the margins of producers, processors and compounders alike.
Coupled with the pressures mention above, the strength of Sterling, a lack of investment and diminishing support from government for agriculture has led to many enterprises being forced to leave the industry. Indeed, only a few compounders are left in Northern Ireland, but still more than ever producing a high quality product and service. The burden of increased administration due to regulation, while assuring the public of food safety, has nevertheless imposed large costs on an industry which must compete directly with product from other countries where these high standards are not met.
We believe the additional burden of rating would push many over the edge of the abyss. Further more, we believe that the assembly should be launching new initiatives to support agriculture, in particular in relation to protection from imports of lower/dubious quality. Otherwise, consumer choice will be severely restricted and Northern Ireland will be deprived of quality local produce.
1.1 Industrial de-rating in Northern Ireland has applied for over 70 years.
1.2 Similar provisions existed in other parts of the United Kingdom but were abolished many years ago. In England and Wales, this feature was abolished in 1963, which more than co-incidentally was just after Northern Ireland had argued for a lower rate of employers' contributions for National Insurance for employers and the Treasury had negatived the idea. Treasury, even then, argued that such a scheme was not justified if only because of the deadweight effect. (The Treasury was prepared to consider a shorter-term waiver in National Insurance for employers in manufacturing who employed more people, but not for existing employees. The scheme was never implemented partly because an incremental waiver was difficult to design as a practical option.)
1.3 The de-rating scheme was abolished in Scotland in the early 1990's1.
1.4 As a result, industrial de-rating is the most conspicuous difference in a comparison of the impact of taxation on businesses in Great Britain and Northern Ireland.
1.5 Since de-rating of industry might be described as a form of operating assistance for industry, its continuation should be subject to monitoring and approval within the European Union under the provisions for State Aid. In principle, general unselective assistance of this kind is not readily approved.
2. The perspective of the current beneficiaries
2.1 Current beneficiaries will, naturally, be reluctant to see de-rating withdrawn. For each business, the withdrawal of de-rating will mean that the business must pay an extra charge. Understandably, existing beneficiaries will protest strongly.
2.2 The relative scale of the extra impost will be a major feature of arguments about the impact of a change. The response will usually be couched in terms of comparative statics. How would an increased cost (an annual rates bill) affect current profitability? What other features of their cost structure also are prominent in a way that might suggest that being competitive in Northern Ireland is more difficult than elsewhere?
2.3 These arguments are generally factually based. However, the conclusions are not always justifiable.
2.4 Nevertheless, any proposal that de-rating should be ended is also a proposal that manufacturing industry in Northern Ireland should face an extra bill of about £60m.each year. This is the equivalent of some £600 per employee.
2.5 Other relative (and static) comparisons suggest that de-rating costs about the equivalent of 0.4% of turnover although the ratio tends to be higher for smaller firms2.
2.6 In terms of the wage bill, de-rating is estimated to be equivalent to less than 1.5% of all wage costs.
2.7 Compared to profitability, the impact of de-rating is put at about 2.7% of annual profits.
2.8 Co-incidentally, the cost of abolishing de-rating is similar to the extra costs that were being carried in terms of dearer electricity. This gap has probably changed as industry has begun to benefit from the competitive market for electricity supplies.
2.9 Also co-incidentally, the benefit of de-rating is of the same order of magnitude as the gain that a company in the Republic of Ireland might have from a 12% corporate tax rate compared to a 25% effective rate in Northern Ireland (assuming that profits are about 3% of turnover and the lower tax rate would then be the equivalent of about 0.4% of turnover.
2.10 All of these estimates also need to be considered in the knowledge that the impact would be proportionately higher on very small businesses. This is an issue that recurs later in this submission.
2.11 The case for the existing beneficiaries will, therefore, be forcefully presented.
2.12 The core of the argument against these statistically based comparators is that, first, Government does not (and has not) accepted a general policy of offsetting cost differences between different firms or regions. Second, changes in Government imposts in corporate taxation, employers contributions to national insurance, or climate change levy occur at intervals and whilst comparative statics point to a big impact on current operational efficiencies, the process of adaptation is rather different.
3. The logic in terms of equity
3.1 The case to retain industrial de-rating is seriously flawed.
3.2 The arguments against de-rating can be expressed in a number of different ways but the critical aspects seem to be the degree of inequity introduced and the ineffectiveness of this scheme in terms of value for money.
3.3 If the scheme creates degrees of inequity, then the justification would have to rest on other benefits that more than offset the inequity.
3.4 Industrial de-rating creates differential treatment of different businesses and also, indirectly, impacts on domestic ratepayers or general taxpayers.
3.5 Since de-rating costs some £60m.pa. then either (1) other local ratepayers pay more than they otherwise might in order to maintain the total revenue for the public sector, or (2) taxpayers (across the United Kingdom) pay higher taxes than might otherwise be raised to allow public sector revenue in Northern Ireland to be maintained, or (3) Northern Ireland has a lower level of public sector revenue and all local citizens receive a lower level of public services.
3.6 Option (1) can probably be ruled out (in this context) since the evidence is that rate revenue in Northern Ireland is proportionately well below the equivalent levels in Great Britain. Both options (2) and (3) may be seen as relevant.
3.7 De-rating, therefore, distorts parity of treatment in a way in which puts the impact on to others.
3.8 Within Northern Ireland there is at present a major examination of the rating system. If, as seems likely, the judgement is accepted that the rating system should play a larger part in generating public sector revenue, then the equity of the distribution of rates within Northern Ireland, whether domestic versus non-domestic, or industrial versus other commercial properties, becomes a critical issue.
3.9 At present, all businesses except those in manufacturing industry and farming, pay rates. These rates, in the best approximate comparison that can be made, are not far out of line with those in comparable areas of England. Higher rate revenues, in the situation where de-rating for industry continued, would fall mainly on domestic households.
3.10 Unless there is a compensating benefit in some other way, the case that all businesses should be asked to pay rates in the same way is very strong. At present, for example, businesses selling tradable services or selling services to incoming visitors, pay rates whilst manufacturers do not. Yet each of these sectors brings added value into the region.
3.11 This points to the case for a broader 'taxation base' for rates both on grounds of equity and in terms of avoiding unfair increases for retailers, IT firms and hotels etc. when compared to England.
4. The logic in terms of impact
4.1 Any case to retain de-rating must overcome the arguments that this is a form of discrimination in taxation. If it remains, then other arguments must point to offsetting benefits.
4.2 These benefits must not only be adduced but must also be argued to be value for money.
4.3 What economic benefits accrue from a policy of industrial de-rating? Do these benefits justify an expenditure of £60m.? What else might be achieved with that £60m.?
4.4 Does industrial de-rating mean that businesses employ more people than might otherwise be employed? Does de-rating attract investment to Northern Ireland that might otherwise go elsewhere?
4.5 The evidence of the PIEDA study points to a conclusion that the impact of de-rating in making Northern Ireland manufacturing more competitive is extremely tenuous and weak. The £60m.cost cannot be linked with significant extra employment and is unlikely to be the factor that attracts external investment.
4.6 In a choice between de-rating and other targeted industrial incentives, the value for money to Invest NI would favour the latter.
4.7 The PIEDA study also suggests that one on the consequences of de-rating may be seen in the rental values of industrial property with one consequence of de-rating being to enhance property returns. This suggests that an end to de-rating would, over a period of time, partly produce a trade off in property rentals that would reduce the impact of the change.
4.8 If Government policy needs to re-inforce the competitiveness of Northern Ireland industry, then de-rating is a blunt instrument that has a very diffuse effect. Deadweight must be a major feature since there is a spread of the impact over a number of industries whose main markets are closer to home.
4.9 In short, in an assessment which asks whether de-rating is value for money compared to alternative forms of expenditure either directly on manufacturing development or, less directly, on the economic infrastructure, the evidence is strongly negative.
5. The alternatives
5.1 Ending industrial de-rating would, on present rate levels, bring an extra £60m.to the public sector each year.
5.2 If this funding was needed for the attraction of inward investment, this might be the means of attracting about 1,500 to 2,000 jobs each year. This would not just be a one off effect.
5.3 If this funding is made available as a support for the RRI programme (Reform and Reinvestment Initiative) it could underpin repayments of borrowing from the National Loans Fund possibly of over £500m.
5.4 The options in 5.2 and 5.3 are attractive alternatives.
5.5 PIEDA does raise questions about the differential impact of industrial de-rating on smaller businesses. The evidence is that, proportionately, the withdrawal of de-rating would affect them more heavily. Whilst this is unwelcome, it should be noted that these smaller manufacturing businesses account for a very small proportion of the turnover of manufacturing, although there may be a large number of firms.
5.6 If de-rating is to be withdrawn, then DETI may wish to consider, at least, a longer period to withdraw the exemption for small firms (possibly 5 years rather than the suggested 2), or an alternative mechanism to encourage exports of goods and tradable services from smaller businesses.
6.1 The withdrawal of industrial de-rating will be unwelcome to those who currently benefit from this tax concession.
6.2 However, de-rating of manufacturing is
- of doubtful value as an aid to international competitiveness,
- an unjustified source of inequity in the tax treatment of all businesses,
- an incentive that is not used in any other European country,
- an expensive option.
6.3 An additional £60m.pa released for development spending and extra public revenue, or to repay borrowing, is a more attractive option.
IRISH CONGRESS OF TRADE UNIONS
The Northern Ireland Committee, ICTU, is pleased to offer some initial views on the questions surrounding the issue of Industrial De-rating. It is our intention to respond in full to the Department of Finance and Personnel's consultative document 'Review of Rating Policy' by 16 September 2002.
By that time we should have a more detailed position on Industrial De-rating and we shall copy this response to the DETI Committee.
Fundamental issues are raised in relation to fairness in the DFP's consultation. In the Programme for Government produced in March 2001 the Executive acknowledged the importance of these matters when it highlighted the issues of equality of opportunity and New TSN.
Currently, manufacturing industry and agriculture do not pay. The NIC believes that it is now appropriate to re-examine the issue of Industrial De-rating given that this form of relief costs in excess of £60 million per annum. In this context, it has to be obvious that other business sectors and householders carry a heavier burden than does manufacturing and agriculture. The NIC would be very concerned if the retention of Industrial De-rating resulted in an additional and unfair rating burden on domestic ratepayers in order that the Executive could raise additional local revenue.
3. INDUSTRIAL DE-RATING
Paragraphs 90 to 93 raise a number of questions concerning the continued use of Industrial De-rating. The fact that it has been abolished in GB, where a lot of both foreign and domestic manufacturing business operates, would seem to weaken the argument for its retention in Northern Ireland. The loss of £64.3 million referred to at paragraph 91 is a burden on other ratepayers as well as other elements of Government.
Notwithstanding this, we are not totally unsympathetic to the views expressed by the CBI on behalf of manufacturing employers. The views expressed as a result of the study carried out by DTZ Pieda would however appear to challenge the CBI position. We note the conclusion:
'.the study concludes that de-rating is not cost effective as a tool of economic development.'
The NIC.ICTU does agreed with the CBI that energy costs are extremely high and constitute a significant competitive disadvantage. The position is further exacerbated by high fuel costs. Higher transport costs for raw materials also impact adversely on our manufacturing sector. High transport and fuel costs also impact adversely on Northern Ireland's exporters such as those in textiles and the agri-food industry.
Notwithstanding these concerns, we do believe that changes to the Industrial De-rating system should be considered, perhaps a phased reduction maybe appropriate. It may also be appropriate to consider a more targeted approach to relief designed to assist those parts of industry that are under severe pressure. These considerations should take place in the context of the Review of Rating Policy.
As stated at the outset, these views are preliminary. Final comment on this issue will be contained in our response to the DFP's review.
NORTHERN IRELAND FOOD AND DRINK ASSOCIATION
22 July 2002
The Food Manufacturing Industry in Northern Ireland is a vital link in a chain supporting some 82,000 jobs in the province. Currently profitability levels are below those required to relevant ROCE's (Return on Capital Employed). Profitability levels have fallen from above 6% to below 2% (DARD Statistics). Any increased tax in the Food Manufacturing Sector would therefore have a serious and dramatic effect causing a rippling effect throughout the economic agri-food corner. The proposed tax would devastate many companies.
We are obviously opposed to this new proposed tax and would point to the unique part that agri-food plays in the Northern Ireland economy.
MR MICHAEL BELL
ULSTER FARMERS' UNION
3 July 2002
The Ulster Farmers' Union welcomes the opportunity to comment on the above and would ask the Department of Finance and Personnel to consider the following points.
As the Ulster Farmers' Union represents nearly 13,000 farming families in Northern Ireland, making it the largest voice for the farming industry in the province, it is entirely appropriate for the Union to comment on the proposals contained within the above consultation.
As support for agriculture and rural economies are a continuing policy objective in the programme for government the following points require careful consideration:
RURAL RATE RELIEF
Domestic Farm dwellings which have an agricultural tie attached to them, are only valued at half the rate that the dwelling would be worth, if the agricultural tie was lifted. (The majority of dwellings that have this agricultural restriction placed on then, considerably reducing their value, are retirement dwellings).
Therefore it is only right that dwellings which have such a restriction placed upon them, should in accordance, have a reduction in the rate bill i.e. halved.
The issue surrounding tourism in rural areas, mainly Bed and Breakfast accommodation and self catering accommodation needs to be re-examined concerning rating issues. At present tourist accommodation is rated at the same rate as a domestic dwelling, even though a self catering accommodation may only have an average 60% occupancy rate, therefore such rating systems need to be taken into account surrounding the entire farm diversification process, to encourage farmers to diversify and in turn create a healthier economy in rural areas.
Government Departments need to work closer together as DARD is encouraging diversification to sustain rural communities, Planning Service to date have looked unsympathetically to such applications, and then rates are applied at the same level as a domestic dwelling on to the likes of self catering accommodation.
The Ulster Farmers' Union is glad to note that the executive is not considering the rating of agricultural land and buildings, and welcomes proposals to further consider wider rural relief's in helping to sustain the economies of declining rural areas.
I trust that these comments are of use.
23 July 2002
Thank you for the opportunity to provide our views on the Rating Policy Review to the Committee for Enterprise, Trade and Industry. I commence with the company's view on the proposal and then, specifically, some comments on the issue of industrial de-rating.
GENERAL VIEW OF THE INDUSTRIAL DE-RATING PROPOSAL
The potential abolition of industrial de-rating is a move that would affect many companies' competitiveness, including that of our own company, and could harm employment prospects and the Northern Ireland economy in the long-term.
The issue of de-rating is a major one for all manufacturing companies in Northern Ireland. This sector of the economy currently benefits from 100% de-rating, which was introduced in response to the deteriorating competitive position of the industrial sector and the erosion of the manufacturing base, and difficulties in attracting inward investment. Industrial de-rating currently saves the sector £61 million per annum. The removal or reduction of the current 100% de-rating would directly increase the costs of companies operating in Northern Ireland and therefore, reduce competitiveness and their ability to both retain and win new business. In the case of our own company, such a move would lead to an increase in costs of £2million per annum.
This is against a background where there are already significant local issues affecting our competitiveness. Utilities prices in Northern Ireland, and in particular, electricity prices, already put companies here at a distinct disadvantage, as we are forced to pay costs well above that of our counterparts both in the UK and internationally. Water costs, too, are in the highest quartile in the UK.
Transport costs are significantly higher than our competitors. Given that our own company exports 100% of what it produces, and that there is no land border with any of our customers, transport costs are a significant proportion of overall costs.
Insurance costs and waste disposal costs are also significantly higher than in the rest of the UK.
As the Committee will be aware, Bombardier Aerospace has been forced to implement significant downsizing and cost-cutting measures, as a result of the economic downturn, which was exacerbated by the events in the US on September 11th. Management and trade unions are currently continuing to try to mitigate the numbers of redundancies we may have to make later this year.
A move to remove or reduce the current 100% de-rating before the aforementioned cost issues are addressed would adversely impact our international competitive position and would place jobs at further risk.
Northern Ireland needs to provide a competitive base to sustain and develop its existing manufacturing industries, as well as being able to offer incentives to attract new inward investment - industrial de-rating is an important part of that incentive package.
SPECIFIC VIEWS ON THE CONSULTATION DOCUMENT
Our comments are limited to the non domestic sector and specifically address the key issue of industrial de-rating:
We disagree with the statement made by DTZ Pieda that it is no longer appropriate to consider international competitiveness as a reason to continue with the current policy.
Many sectors of manufacturing in Northern Ireland have been in decline for some time, while still others compete against companies located in low cost economies in Eastern Europe and the Far East. The Government has been trying to arrest the decline of traditional industries but with limited success. Within the aerospace industry we are faced with an on-going requirement to reduce our cost base in order to remain competitive within the Global marketplace. Due to the internationally mobile nature of aerospace programmes, it is vitally important that no actions are taken to increase overall operating costs without addressing the significant Northern Ireland cost penalties which already exist.
For example, electricity prices in 2001/02 increased by over 20% for many industrial customers in Northern Ireland against no or very modest increases in Great Britain. The table attached compares the unit cost of electricity in a number of countries and shows that Northern Ireland is significantly more expensive, for example, prices would have to fall by 41% to match the UK price level.
We disagree with the contention that the increased cost, arising from the removal of de-rating, is not significant. Against the back-drop of intense price competition within the aerospace industry and the requirement to achieve 'real' price reduction in order to retain existing work and attract new aircraft programmes, a £2M cost increase is highly significant, given our inability to pass the increase on to either our customers or our shareholders.
Inward Investment Incentive
We view industrial de-rating as an essential element of the overall investment context within Northern Ireland and therefore reject the proposition put forward by the consultants that it does not act as an investment incentive.
The statement made by the consultants that "the manufacturing sector is not concentrated in areas of high deprivation or high unemployment nor is it concentrated in areas where the population is predominately Protestant or predominantly Roman Catholic" is inaccurate in relation to our company. It takes no account of the mobility of labour nor the effects of the Troubles, which in some areas have led to imbalanced workforces. As the largest private sector employer in Northern Ireland, our company employs 7000 people and, like many industries, is located at several sites in the Belfast area. Many of our 7000 employees are from areas of high unemployment and deprivation. A high proportion of employees travel each day from South Down, Armagh, Tyrone and Antrim from areas where there are pockets of high unemployment. A significant proportion of employees are from Belfast itself. The concentration of deprivation and unemployment in Belfast has been well documented and is acknowledged by the Department of Social Development in its draft strategy for the Belfast Regeneration Office which is currently under public consultation. It has also been recognised by DSD, DEL and DETINI in the setting up of the Greater Shankill/West Belfast Task Force to recommend measures to deal with the highest unemployment black spots in Northern Ireland. A significant number of our employees are from these areas. Bombardier has been an active participant in the Task Force, and indeed has now initiated training programmes in the areas concerned in order to attract more employees from these areas.
Once again, I would like to thank the Committee for the opportunity to share the company's perspective on this important issue and would be happy to provide any further clarification if required.
Director - Communications and Public Affairs, Europe
ELECTRICITY COST COMPARISON 2002/03
Unit Cost (p/kWh)
Climate Change Levy (p/k/Wh (5)
Total Unit Cost
Unit Cost Variation
Percentage reduction from NI cost
Notes: (1) Average quoted electricity price from Scottish Power to Shorts
(2) Average unit cost for a similar large industrial user in the Rep of Ireland @ £1=1.50 Euro (source: Energy Information Centre)
(3) Average unit cost in Canada Feb '02-Mar '02 (@£1CAN$2.24)
(4) Average unit cost for a similar large industrial user in England (source: Energy Information Centre)
(5) The climate change levy only applies to the UK
1 See PIEDA report, para.3.19
2 These figures all drawn from the PIEDA study