Committee for Enterprise,
Trade and Investment

Wednesday 30 January 2002

MINUTES OF EVIDENCE

Industrial Derating

(Confederation of British Industry)

Members present:
Mr P Doherty (Chairperson)
Mr Armstrong
Mr Clyde
Mrs Courtney
Mr McClarty
Dr McDonnell
Dr O'Hagan
Mr Wells

Witnesses:
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.

15 January 2002 (part iv) / Menu / 6 February 2002 (part i)