Memorandum submitted by the Petrol Retailers
Association
INTRODUCTION
The Petrol Retailers Association (PRA) is a
major Trade Association within the Retail Motor Industry Federation
(RMIF). The Association represents the interests of 3,000 forecourt
retailers throughout the United Kingdom. The forecourt retailers
are independent of their motor fuels supplier.
The RMIF serves and represents businesses concerned
with all aspects of the retail motor industry products and services.
It aims to assist, support and promote members with the highest
standards of operation for the mutual benefit of themselves and
their customers.
The RMIF is the lead body for the motor and
retail transport fuels industries whose combined total turnover
is in excess of £85 billion per annum, whose workforce numbers
700,000, and whose customers contribute £32 billion per annum
in motoring taxes, Excise Duty, and VAT.
The retail motor fuels industry in Northern
Ireland is conducted from approximately 500 service stations across
the Province. The PRA represents about 100 of these locations.
In 1996, before the advent of illegally imported products, the
total fuel sales of around 700 service stations accounted for
2.8 per cent of the total UK market. Similarly, the percentage
remained the same for Northern Ireland's share of all UK Excise
Duty collected.
The illegal sale of transport fuels occurs in
Northern Ireland because the products concerned have been brought
in from the Republic of Ireland without duty being paid. In simple
terms they are being smuggled. The reason why they are smuggled
is because petrol and diesel costs less in the Republic of Ireland,
where the Government applies a lower rate of Excise Duty. They
are purchased in the Republic and transported north into the Province
where they are supplied to service stations for resale—without
the UK's higher level of Excise Duty being paid by the supplier
on entry.
Northern Ireland has the UK's only land border
with another EEC Country and therefore experiences a lot of cross
border shopping; a quite legal practice. This consumer practice
deflates sales in the fuels industry and other retail trades,
but in reality it is quite a small effect experienced by service
stations in proximity to the border areas. Smuggling of petroleum
products, however, is not similarly contained in the border area
and has an effect over the entire network of service stations
in Northern Ireland.
2. SMUGGLING OF
PETROLEUM PRODUCTS
A. Why is smuggling taking place?
The cause of the problem is due to the price
differentials between North and South. Petrol attracts Excise
Duty of only 24.54 pence per litre (ppl) in the Republic of Ireland
against 43.99 ppl in the UK and diesel 21.35 ppl in Ireland compared
to the UK's 44.99 ppl. Opportunists, not necessarily associated
with the transport or retailing industry in either country, are
taking advantage of the situation because of the scale of the
profit opportunity.
Example (assuming road transport fuel taxation
levels):
Assume a road tanker carries 25,000 litres of
diesel fuel from the south into the north of Ireland. The profit
potential when sold to a service station for resale is the differential
in cost price (44.99 ppl-21.35 ppl=23.64 ppl), less the cost of
VAT paid in the Republic of Irelan12
d at 21 per cent (4.96 ppl), less transportation
costs (assume, 1.0 ppl).
As a minimum, the net profit therefore is 25,000
litres x 17.68 ppl = £4,420.
If the supplier of the smuggled fuel adds UK
Value Added Tax of 17.5 per cent with no intention to pay the
same amount to Customs and Excise, the profit is enhanced by a
further 7.87 ppl.
Revised value of net profit from one smuggled
load of 25,000 litres x (17.68 + 7.87) 25.55 ppl = £6.387.50.
Smuggling is also taking place because Customs
and Excise, who own the problem, cannot contain the scale on which
it is occurring.
B. What is being smuggled?
The smuggling began in 1997 with diesel fuel
oil, because the product was less hazardous and not subject to
the strict rules applied under the "Carriage of Dangerous
Goods" Act. These regulations would apply if petrol had been
transported on a road vehicle. Furthermore, the much smaller quantities
of diesel normally sold within the retail fuels market meant that
correspondingly smaller vehicles could be employed. Risk of detection
was therefore diminished.
Today much of the diesel product being smuggled
is fuel oil intended for use in the agricultural or construction
industry. This form of "diesel" is used by vehicles
"off road" and attracts a much lower level of Excise
Duty, 5.0 ppl, in the UK. A marker (die) that can only be removed
by adulteration of the base product identifies it. The term used
when this practice is applied is that the diesel has been washed.
The profit calculation outlined above increases substantially
if this other fuel is sold as standard transportation diesel.
C. When did serious smuggling begin?
In March 1998 the UK Budget raised Excise Duty
on motor fuels by 6 per cent real and equating to circa
5.5 ppl (including VAT) on both petrol and diesel. Consequently
the differential of rates compared with the Republic of Ireland
became more pronounced. Opportunists previously referred to, were
prepared to accept the risk of smuggling petrol as well as diesel.
The scale of the problem has escalated steadily throughout 1998.
3. WHO IS
AFFECTED BY
THE SMUGGLING
OF PETROLEUM
PRODUCTS?
The effects are severe already, and will become
worse if no remedial action is taken. The following are the categories
that are affected by smuggling.
A. Operators of service stations in Northern Ireland
Unfair competition from other service stations,
or temporary and inferior tank and pump facilities retailing diesel
from the road-side (allowed because the Petroleum Regulations
do not apply to this product), who sell smuggled fuel at prices
below the UK norm threaten survival of the business.
Service station operators who suffer financially,
because they continue to purchase only legal fuels, may eventually
be confronted by an unfortunate choice and as a consequence break
the law. Their survival may only be assured if they increase profitability
by purchasing smuggled fuel.
B. Consumer
If many service stations are forced to close,
consumers will lose local convenience to refill their vehicles
and enjoy the other facilities that these retail outlets provide
in the Northern Ireland market.
Competition between fewer service stations in
the aftermath of smuggling will be less. Implications are for
higher fuel prices as market demand is satisfied at a higher profit.
If washed diesel is supplied to a customer,
it is unlikely that it will meet the required legal specification
for the product. Damage to an engine could quite easily occur,
and use of an inferior product would invalidate any warranty claim
against the motor manufacturer.
Hypermarkets have entered the Northern Ireland
fuels industry. Total litres used is currently declining each
year, and service stations that close now because of the effects
of smuggling will not re-open. Consumers will drive further for
their fuel and other necessities.
C. Residents of Rural Areas
Perhaps the most vulnerable of all. A service
station in these areas is also the provider of many other services
that support the community. A focal point for residents, providing
a range of retail services from banking to car servicing. Once
closed, many will never re-open because of the costs that will
remain a barrier to entry.
D. Major Oil Companies
Those companies currently supplying the retail
fuels industry are experiencing a greatly reduced demand for their
products. If they do not see a lasting solution implemented to
protect their considerable investment in service station facilities
within the Province, they will inevitably revise their mid and
long-term plans.
In the short term the oil companies have to
consider supporting some retailers to sell fuels at uneconomically
low prices to address the retail price of smuggled fuel. This
practice is not commercially sustainable and will influence the
timing of the previous example.
E. Local Fuel Oil Distribution Companies
These companies supply service stations across
Northern Ireland whose annual sales volume is too small to be
supplied by a major brand such as Esso, Shell or BP. They sustain
the survival of sites in more rural areas, such as around the
border, which without their existence would have no other source
of supply in Northern Ireland.
These distributors have suffered significantly
since smuggling increased in 1998. It is impossible for this type
of business either to supply legal motor fuel products at prices
competitive to those smuggled, or assist retailers to reduce price
when unfair competition arrives in their trading area.
F. Transport Companies based in Northern Ireland
Fuel costs are a large part of the operational
expenses for a transport company. With dramatic price differences
between the UK and the Republic of Ireland, any transport company
from the Province competing for business against one located in
the south is in an impossible position. The financial effects
can obviously not be sustained for any period of time, and are
bound to threaten survival of many in this sector.
G. HM Treasury
With a sharp decline in demand for motor fuels
carrying UK levels of Excise Duty, HM Treasury is in receipt of
less income. Furthermore, this total is increased by non-collection
of VAT on the fuel sales and from taxes paid by service station
operators and others on declared profit performance.
H. Northern Ireland Economy
The failure of a business means unemployment
and a cost to Government. In many rural areas, alternative employment
will not be easily found in another retail sector. It should not
be forgotten, however, that the effects of smuggling do not just
apply to these areas and that they will impact to a greater degree
in all urban areas of Northern Ireland as well.
4. HOW MUCH
PETROLEUM IS
BEING SMUGGLED?
There are no precise figures available, as has
been confirmed by a Government spokesman. As at the end of November
1998, Customs and Excise in Belfast confirmed that they had seized
48 vehicles involved in smuggling. In addition over 400,000 litres
of fuel had been seized by Customs, and they had confirmed that
a further 24 million litres had entered the Province illegally.
It should be assumed that this is a very small
part of the overall total.
5. VALUE OF
SMUGGLED PETROLEUM
PRODUCTS
There is no accurate way of defining the value
of smuggled product as there is no manufacturing source of motor
fuels in Northern Ireland. Excise Duty is paid when leaving the
refinery but then movement is not tracked as it moves to other
parts of the UK. So, the performance of the retail fuels industry
compared with the previous year is not possible.
The major oil companies all confirm significant
shortfalls in volume sold to retailers, and it is even realistic
to speculate that, year on year, some experienced losses of 40
per cent. A very conservative estimate of the cumulative effective
loss to the Treasury is £100 million per annum.
6. THE WIDER
EFFECTS OF
SMUGGLING
It has already been demonstrated why the implications
to the retail oil industry of Northern Ireland are wide-ranging
and extremely serious. A prolonged period during which the smuggling
issue is not adequately confronted by the UK Government may well
see at least one of the major fuel brands reconsider its presence
in the Northern Ireland market.
Assessing the situation today, and without an
implemented solution in the short term, a likely long-term scenario
for the retail fuels market is the decimation of service station
numbers, with certain destruction of customer choice and local
convenience.
The economic implications are clear. If an illegal
practice is allowed to dismantle the infrastructure of one of
Northern Ireland's established industries, more consumers and
businesses will be forced into cross-border shopping, the reason
being that sufficient retail fuel facilities will quite simply
not exist within the Province.
7. THE SOLUTION
RECOMMENDED BY
THE PETROL
RETAILERS ASSOCIATION
The ultimate solution is harmonisation of applied
levels of Excise Duty between the Republic of Ireland and the
UK. With the Irish Government choosing not to increase Excise
Duty in their December Budget, and with a differential that fixes
the UK at approximately double the level in Eire, it is not realistic
that this will occur in the short or medium term.
The PRA accepts that that EEC Regulation prevents
the UK Government from introducing a two-tier structure of Excise
Duty within regions of the UK. However, cross-border differentials
exist elsewhere in the Community between members countries, as,
for example, between The Netherlands and Germany. In that case,
the price difference is a fraction of the problem currently affecting
Northern Ireland motor fuel retailers, but nevertheless the solution
adopted by the Dutch Government is one that can be transferred.
A concession is allowed on payment of Excise
Duty depending on distance from the German Border. Those filling
stations within 10 kilometres are given an allowance that permits
them to equal the German prices, those 11 to 20 kilometres distant
have a retail price that is set at half of the market differentials.
This concession has been allowed to small and
medium-sized businesses for approximately 16 months and with the
knowledge of the EEC Competition Authority.
Similar distance-based criteria would not be
sufficient to address the problem in Northern Ireland, because
of the physical size of the Province, and the relatively short
distance to the border with the Irish Republic from any point.
But more importantly, because of the extent to which smuggled
products are now being offered for purchase in Northern Ireland,
all service stations in Northern Ireland should therefore receive
a concession, off invoice at the time of purchase, to harmonise
retail fuel prices exactly with the Republic of Ireland.
The PRA suggests the mechanism is the correct
one and recommends its support by the Northern Ireland Affairs
Select Committee to the Government.
8. SUMMARY AND
CONCLUSIONS
It is evident that Customs and Excise in Northern
Ireland do not have sufficient resources to prevent smuggled motor
fuel crossing the border in increasing quantity. The modes of
smuggling are at best described as inventive. The opportunities
for profit are considerable and made even larger when smuggled
product is resold from service stations. The environmental hazards
posed by illegal and dangerous facilities in Northern Ireland
are considerable. The efforts of HM Customs and Excise to date
have made little real impact on the volume of smuggling. Failure
of Customs and Excise to deal with the problem has led to new
entrepreneurs appearing daily. Not surprisingly, these circumstances
have attracted new participants to both the transport and retail
fuel industries, with financial resources gained from other illegal
practices.
Unfair competition, through smuggling affecting
the financial performance of service station profitability, has
forced a number of law-abiding retailers to consider carefully
if the only remaining way to save their livelihood is to purchase
smuggled products.
The situation is now arising where the volume
of fuel supplied by smugglers is already supplying greater quantities
of illegal fuel than some of the legitimate oil companies based
in Northern Ireland. The present situation means that some legitimate
oil companies may withdraw completely from the supply chain in
the Province. The infrastructure of the fuel oil industry is under
threat, and its decline will mean a long lasting effect for the
economy of Northern Ireland.
The PRA believes that any solution has to be
cost effective, practical, sustainable, give no reward to those
involved in the fuels industry for illegal gain, and be so totally
transparent that it is easily acceptable to authorities in both
London and Brussels. The solution that has been proposed will
provide those qualities; and its implementation should be urged
upon the Government with the utmost urgency so that many service
stations can continue to contribute to the well-being of the economy
and the people of Northern Ireland.
13 January 1999
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