Committee for Enterprise,
Trade and Investment
Tuesday 3 September 2002
MINUTES OF EVIDENCE
Industrial Derating
(Irish Congress of Trade Unions)
Members present:
Mr Neeson (Deputy Chairperson)
Mr Armstrong
Mr Clyde
Ms Courtney
Mr McClarty
Dr McDonnell
Mr McMenamin
Ms Morrice
Mr Wells
Witnesses:
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.
3 September 2002 (part i)/Menu /3 September 2002 (part iii)