Select Committee on Northern Ireland Affairs Minutes of Evidence

Examination of Witnesses (Questions 200 - 219)



  200.  It does not take into account labour costs?
  (Mr Norris)  No.
  (Mr Archer)  If we want to go into the detail, if you take a small operator, a single operator, who then would not be pricing in his own labour, yes, we worked out that it would be cost-effective for him to travel 40 miles to the border, in other words, an 80-mile round trip, and that is about the cut-off point, but for a large operator employing labour, I go back to what I said before about a 30-mile round trip, in other words, 15 miles, perhaps a little further; it depends on the size of the fuel tank that you have, it depends on the exchange rate, how attractive it is.

  201.  Ms Smith mentioned the problem of people legitimately filling up tanks and bringing them back to Northern Ireland and then it being transferred, but the only problem arises at the stage where it is transferred? This is where the illegality takes place?
  (Ms Smith)  That is right.

  202.  If numbers of your members are involved in the initial legitimate activity, then it is not very easy to gauge whether they then on some occasions fall over into the illegal activity, is it?
  (Ms Smith)  That is right.

  203.  So when you are insisting to us that your members are beyond reproach, there is no means of catching them given the complexities involved.
  (Mr Armstrong)  It is not at all clear to us that is actually an illegal activity. It is if you believe what Customs & Excise say in the Province, but I am not sure. If you transfer petrol from a car you own to another car you own, is that an illegal activity? It is an issue which needs further questioning.

  204.  But there would be an illegality if it was sold on elsewhere?
  (Mr Armstrong)  Absolutely, yes.

  205.  Do any of your members based in Northern Ireland have dedicated service refuelling depots in the Republic so they can take advantage of fuel that is legally available?
  (Ms Smith)  Most hauliers will operate with fuel cards, which means there would be garages in the South of Ireland where they go and fuel up at a rate which would be set on a daily basis.

  206.  But it is not involving your organisations? What is happening is that people are establishing refuelling points near the border?
  (Mr Norris)  Generally speaking, the fuel market is a very fine market and as it happens in the mainland the RHA does have a fuel card scheme which offers a special price to members who operate under the RHA umbrella. As Ms Smith said, for the overwhelming majority of people in Northern Ireland that scheme is really irrelevant when compared with the implications of simply travelling south of the border. If you do that with one of the many fuel cards which every fuel company operates, it is not necessary actually to have a dedicated arrangement in order to take advantage of the lower price.
  (Mr Armstrong)  It is fair to say that quite a number of the larger operators in Northern Ireland actually have depots already in the South of Ireland. It is nothing to do with this issue, they just already have depots in the South of Ireland anyway. Clearly where they have normal cross-border operations they would be fuelling-up while down south. There is another issue which is called flagging out, which is taking place as we speak. As a result of the combination of high vehicle excise duty, which is the other issue, many of these companies are either actively considering or actively engaging in flagging out activity or, at the very least, transferring the bulk of the fleet to operate in the Republic and perhaps maintaining only a smaller proportion of the total fleet in the North of Ireland.

Mr Hunter

  207.  I think, Chairman, our witnesses may feel that they have well and truly exhausted the theme I intended to raise, but in case they want to say anything more or say anything again I will give them the opportunity. I wanted to talk specifically about the recent Budget duty changes and the significance of those changes and their impact on the level of cross-border fuel purchases. You may feel there has not yet been sufficient time to turn perception into evidence but would you say there has been a discernible impact of that Budget? Perhaps you would like to talk on that and any more Budget-related points.
  (Ms Smith)  I would certainly say that the diesel increase in the last Budget, along with VED rates—which are currently for 40 tonnes £1,300 in the South of Ireland and £5,750 in the North of Ireland—was really the last straw for hauliers and it has really now forced every haulier to look at their operations. Bob has mentioned flagging-out, if the majority of hauliers move their operations south of the border, even smuggling is going to be irrelevant because there will not be any hauliers left in Northern Ireland, they will all have gone south with their operations.
  (Mr Norris)  I do not think it can be said enough, Chairman, that all smuggling is a function of price differentials, that is a statement of the blindingly obvious. In this particular case, every time you pay a £1 for fuel 85p of it, one way or another, goes to the Chancellor of the Exchequer. So this is a commodity whose price is overwhelmingly determined by fiscal policy and the effect of the escalator at this time, which effectively raised fuel prices by 11 per cent, was to widen the gap between the price which continental operators pay and UK operators pay to a degree that means that even where there is a sea crossing involved—and I am referring of course to cross-Channel activity—there is evidence of 40 per cent more foreign trucks working across that sea crossing into the United Kingdom over the last two years than pre-existing. I have to say, and I accept Mr Hunter's invitation with enthusiasm to make this point, that the Treasury does seem to forget that there is one European Union member with whom we have a land border. Where there is no ferry cost, where there is no toll to pay in passing from north to south, where it literally is as easy as Ms Smith said as moving just a few hundred yards on occasions in order to go south of the border to buy fuel, it is absolutely as plain as a pikestaff that there is an enormous imperative to do so when the fuel that you buy, representing let us say 30 per cent of costs, is bought at 50 per cent of its price north of the border. Thus you are 15 per cent of your operating costs better off. In an industry where margins are, as I indicated earlier, around 3 per cent on turnover, that is the difference between operating profitably and frankly not being able to operate at all. So the trade associations have indicated to their members that they will help them to flag out their operations to countries which have a more benevolent and attractive regime, that would certainly include the Republic, and also of course, as we have acknowledged, the problem of cross-border shopping is simply going to get greater and greater. The one point we would make to the Committee, Mr Chairman, and it is germane to your precise investigation, is that there is a slight irony in that as the gap between legitimate prices north and south of the border widens, the extent of traditional smuggling is probably slightly diminished, not greatly but slightly. If you add to the already horrendous gap the further price advantage which derives from buying illegal marked fuel, whether it is green south of the border or red north of the border, then obviously the attractions are even greater. We think it is a position which is simply unsustainable in the longer term. When Ms Smith talks of the entire industry effectively being registered as companies south of the border, using therefore Republic of Ireland plates on their vehicles and buying all their essential fuel south of the border, that is not a reductio ad absurdum, on the contrary that is a very practical proposition, we would be surprised if it was not the case.

  208.  A few minutes ago you said something like, "the Treasury appear to have overlooked the land border with the Republic", that prompts me to ask what dialogue, if any, your respective organisations have been able to establish with Government. Have you succeeded here? Have you found it satisfactory? What sort of response or reaction have you met with?
  (Mr Norris)  I think I ought to say that in my experience the Treasury has never been noted for its willingness to extend the warm hand of tolerance and friendship to business, industry or for that matter other spending departments of Government.


  209.  I must remind you, Mr Norris, I served for four years as a Treasury Minister!
  (Mr Norris)  Well, I need not remind you, Mr Chairman, I served for four years as a spending Minister and therefore our views on these matters are likely to be somewhat at variance! Bearing in mind your own good nature in these matters, I suspect your better judgment would tell you that the Treasury has not been historically particularly prone to this argument. It is arguable that several years ago, for example, when sterling was weaker vis-a-vis both the punt and other near-European currencies, and when the effects of the escalator were not really evident—it was introduced about six years ago by the last Government at 3 per cent plus inflation—these differences were perhaps less remarkable. Our view is that they are now getting to the level where they are extremely remarkable. The direct answer to your question is that since this Government came into office, the two trade associations have repeatedly asked to see a Treasury Minister and the first occasion on which we did so was last week when my opposite number, David Green, the Director General of the FTA, and I met with a Treasury Minister in the company of the Minister of Transport under the aegis of the new Industry Forum which he has recently agreed to establish. But prior to that we have had very little dialogue.

Mr Hunter

  210.  One small dimension of this big problem which has been put to us is that the Northern Ireland Office sees the issue as a Treasury issue, and in terms of the entirety of the United Kingdom the Treasury appears to see it, as I understand it, as a minor problem. So you have what is a major problem in a small part of the United Kingdom not being recognised as such by the Treasury. Is that a perception which your associations would share?
  (Mr Norris)  Yes, indeed, precisely that.
  (Mr Armstrong)  It seems to me this is actually a United Kingdom problem because the whole issue of the combination of high fuel duty and high vehicle excise duty is causing quite a number of people in England, particularly in the South of England, to flag out parts of the fleet or indeed their entire fleet to the Netherlands and other countries the other side of the water. So the high level of taxation overall on the industry is a UK-wide problem. While the fuel smuggling issue is purely a Northern Ireland issue as we speak, although as I said earlier it might develop elsewhere, the sheer level of taxation is a UK-wide problem.
  (Mr Norris)  But whatever the level of the problem in the United Kingdom generally, it is much more acute in Northern Ireland.
  (Mr Archer)  Chairman, the first part of Mr Hunter's question was has this problem become worse as a result of the last Budget. I would like to add that legitimate cross-border shopping has been going on for some years but it has increased enormously since the Budget because fuel can be purchased at almost half the price it is in Northern Ireland. If at the next Budget the escalator mechanism applies, the disparity is going to be even more marked, and I would contend it will not be long before none of the vehicles in Northern Ireland operating above 32 tonnes will fuel in Northern Ireland, they will go south of the border.
  (Mr Norris)  It is also worth pointing out, as I am sure the Committee is aware, the Dutch-German border situation has forced the Dutch Government to recognise the need to build in a kind of buffer zone in which a differential duty arrangement exists. Translating those distances of 10 km, 20 km, into Northern Ireland—which incidentally reinforces the point that our operator colleagues have made—it does seem as if the logic of what is happening in the North of Ireland is not being recognised in the way other governments do recognise it. The French Government has recently introduced an essential user rebate for its haulage industry specifically to recognise the differential in fuel prices between it and other countries in Europe, principally Luxembourg. It is an irony they should be doing that when, of course, our competition is principally from the Republic of Ireland and from France.

  211.  So you would recommend to the Committee to look carefully at how a comparable problem is being handled elsewhere in the European Union?
  (Mr Norris)  Indeed, Chairman.
  (Ms Smith)  I think, Mr Chairman, it is also important to realise that Northern Ireland cannot operate without the haulage industry. Everything that is moved in Northern Ireland is moved by road, we have virtually no rail network whatsoever, in fact I think we have one goods train which runs from Belfast to Dublin and on to seaports in the South of Ireland. Therefore we need a haulage industry. What this Committee and what the Government have to decide is, is the haulage industry in Northern Ireland going to be run and operated by people from Northern Ireland or is it going to be run and operated by people from other EU countries. It is as simple as that.
  (Mr Armstrong)  One illustration, the vehicle excise duty for a maximum sized 40 tonne vehicle in the Republic is about £1,200, roughly, and it is now, post the Budget, £5,750 in the UK, so approximately £4,000 per vehicle differential.

Chairman:  I am not in any way seeking to clamp down on this discussion but that does seem to be taking us back to the issue I raised at the beginning of the meeting.

Mr McCabe

  212.  It is probably fair to say that we have heard quite clear descriptions of the problems as you and your members see them, and I think we have heard similar descriptions from other witnesses before. I was conscious in response to Mr Hunter, I think it was, Mr Norris said that you advocated looking at the situation in other countries and you mentioned the French and Dutch position. I understood the Dutch position was under investigation at the moment, but is that your main suggestion in terms of a solution to this problem, or do you have other specific solutions which you think the Government should take on board?
  (Mr Norris)  I will perhaps start by making the point that overall our industry believes that the Government has to look at harmonisation of fiscal policy if it is to be a participating member in a single market. There may be an argument about whether that harmonisation is imposed by the European Commission or is agreed to unilaterally by the Member States, I have no position on that, nor does my Association. But the logic of harmonisation of duty rates when you have a single market across Europe, and we do have a single market in haulage since the abolition of cabotage restrictions, we think is overwhelming. Setting that aside, there are a number of things which we think would assist the situation in Northern Ireland. The first is to review the application of the fuel duty escalator. It is now very difficult, some six years after its inception, to point to any real evidence of its environmental benefit, but it is very easy to point to the adverse consequences of its application in terms of jobs. I just make the point in particular in relation to road haulage, the point Ms Smith made must be borne in mind constantly whenever one is tempted to see the application of the escalator as somehow having an environmental benefit, because there is no opportunity to transfer freight, for example, in Northern Ireland from road to rail, and there is generally very little prospect of deliveries simply not happening. The only consequence of the present policy therefore is (a) to add costs to the consumer and (b) replace United Kingdom vehicles and drivers with continental vehicles and drivers, and in this case, generally speaking, those from the Republic of Ireland. So we argue for (a) harmonisation (b) a recognition of the lack of environmental logic in the present policy which was always seen as its great rationale and (c) in relation to essential users of diesel, that is to say particularly in the freight and public transport industry, some recognition for the need for the freight industry's purchase price to be on a par with the industry south of the border. We have called this device an essential user rebate and it effectively works by rebating to legitimate recognised operators, in other words licensed operators and that in Northern Ireland includes own-account operators who currently operate under a slightly different regime, a specific rebate relating to the difference in price between the cost of fuel north and south of the border. We are not looking for feather-bedding, we are merely looking at a level playing field. That is an idea, which I am sure Mr McCabe knows, we put forward to the Government in relation to the United Kingdom as a whole but it is particularly relevant in the Province.
  (Mr Archer)  Chairman, every litre of fuel that an operator legitimately purchases in the Republic of Ireland means a reduction of 50.21p per litre that the UK Exchequer is not getting and instead the Republic of Ireland is receiving the equivalent of 22p sterling. There must be a cut-off point somewhere where that purchase can be retained within the UK.
  (Mr Norris)  Our figures indicate that the cost of providing the essential user rebate is very substantially offset by the increased revenue to the Treasury which derives from precisely the absence of this cross-border shopping which Mr Archer is referring to.
  (Mr Armstrong)  Could I underline the point about the inelasticity of demand for freight transport? We are the ones who determine how much freight moves because we purchase things in the shops and that demand has to be reacted to. Whether or not the fuel price escalator policy would work in getting Sunday drivers off the road is a different issue, it might do if the price went on up for long enough, but it will not reduce the demand for road freight transport because everything goes onto the back of lorries to be delivered to the shops. I think this problem would have emerged much sooner had it not been for the fact that the world commodity price for oil has been at relatively low levels over the last few years and indeed almost at an all-time low if we go back about six months, but I noticed over the last couple of weeks that is beginning to change and the commodity prices are beginning to rise. Whether that will be sustained is another matter but that is the way it looks. In which case, even your average motorist might start to feel hit hard in the pocket by the combination of the policy and the underlying commodity price coming back.

  213.  Can I just be clear about a couple of quick points? In terms of duty harmonisation, I noticed Mr Norris said he was not wishing to enter into the political debate about where it is set, but the effect of this would be that the duty for Northern Ireland would be determined by the duty rate set in the Republic. That would be the effect of harmonisation in this case. Am I right to assume your Associations would be happy about that? I did notice earlier that I think it was Ms Smith said she was concerned about retaining a Northern Ireland haulage fleet rather than have one in another EU country. A different aspect of that problem might be the question whether Northern Ireland duty rates are determined via the Republic. I wondered if I would be right to assume that both your Associations would be happy with that position. I am not sure all other people in Northern Ireland would necessarily share that view but I did wonder if that was what you were saying.
  (Mr Norris)  It is extraordinary how keen one is on harmonisation when it is harmonisation downwards and how indifferent to the proposition one is when one is asked to increase duty rates. My serious answer would be this, as it happens, the UK is unique within the European Union in two respects in relation to fuel. Firstly, it is the only country in Europe which has employed a fuel duty escalator; no other country in Europe has employed a fuel duty escalator. Secondly, it is the only country in Europe which has the same rate of duty for diesel as it does for unleaded petrol. So in both respects what you have is a situation in which every other country in the European Union is driving down the harmonised price of fuel and it would actually, I think, be genuinely misleading to suggest that the only issue here is the price in the Republic.

  214.  With respect, this whole debate has centred on the effects of the hauliers you represent versus the price in the Republic.
  (Mr Norris)  That is a perfectly fair point but I think the response we were making was where you are looking at harmonisation, if you were looking for example to harmonise rates of corporation tax throughout the European Union, the United Kingdom would find itself in the position where, if anything, it had to raise rates. In relation to fuel duty the United Kingdom has to lower its rate both vis-a-vis the French and other near-European countries for the South of England and also vis-a-vis the Republic of Ireland for the North of Ireland. So we do not see anything in terms of territoriality about the proposition that harmonisation would mean lowering UK fuel duty. If the Republic were required to raise its fuel duty to the same level as that which prevailed in the United Kingdom, whilst we would be left with an even bigger issue in relation to the old-fashioned smuggling of red and green diesel, we would certainly eliminate this enormous amount of what we might call legitimate movement of cross-border purchasing and of tankers coming north of the border and so on which we have been spending so much time discussing.
  (Mr Armstrong)  The context of the discussions has been on Northern Ireland because we are giving evidence to yourselves, but we have been advocating the essential users rebate UK-wide because this problem is not just a question of the North and South of Ireland; it is increasingly a question of England versus countries on the continent. The differences are enormous and it is a fact we do have a single market for haulage, there it is no question of being able to put up some sort of drawbridge and say, "You cannot come in", we are in a single market, people can bring their vehicles over here, carry out cabotage journeys, spend several weeks at a time here if they want, and they do so having the benefit of a lower cost base. Clearly if they are here for several weeks they would be paying our higher fuel duty but they would still come from a basically lower cost base. So it is a UK-wide problem but it is much more acute in Northern Ireland.
  (Mr Archer)  As a Northern Ireland operator I would add to that. This is a specific problem, a practical problem which applies to Northern Ireland today because we have a land border with the Republic of Ireland. If we had a land border with France or with Belgium, the problem would be occurring in the South East of the UK as well, but it is a specific problem because of the land border. The disparity of prices argument does apply in other areas as well as Northern Ireland and the Republic of Ireland.

  215.  Can I pick up the question of harmonisation? Assuming it was possible to harmonise the duty by whatever means, you still face the currency differential. How would you propose to address that?
  (Mr Norris)  We have worked on the basis that the Treasury would take as its yardstick a periodic revaluation of the real duty rate on both sides of whatever border was relevant. So it would be true to say that provided there were different currencies in operation either side of the border, there would be the day-to-day fluctuation in their value which it would be almost impossible in this context to avoid. But that has not been a major impact and that is capable of being, in a sense, remedied on a fairly regular basis, indeed it is one of the Chancellor's macro-economic responsibilities to attempt to do that. Here it has been the effect of the disparity in exchange rates that has underlined and exacerbated the underlying problem of fuel duty. Incidentally, as Bob Armstrong says, the change now in the real price of landed fuel, in other words the spot price of fuel, is now tending to add further exacerbation to the issue.

  216.  You mentioned your proposals for a rebate system, I suppose I could reasonably call that a subsidy—I do not want to get bogged down into the detail but I think it amounts to roughly the same thing—have you given any thought to the cost of what you regard the effects of subsidy to be before it would really make a difference? What I am asking is, what size of subsidy do you think would be necessary before it would have a meaningful impact and what do you think that would cost?
  (Mr Norris)  The RHA commissioned research by the Centre for Economic and Business Research, which is headed by Professor Douglas McWilliams who is a leading economic analyst, into the UK-wide implications of an essential user rebate which would be fixed at the difference between the UK duty rate and the near-European duty rate. I make the point about duty rates because bearing in mind the actual cost per litre of the fuel is around 8p—and going back to my earlier point, 85p in every £1 is effectively duty—it is the duty rate that is relevant. With that in mind, our calculation was that across the whole UK, and we did not do a separate calculation for Northern Ireland but we would be prepared to look at that if it would assist the Committee, there would be something like this year, that is to say 1999, a revenue loss of something like £4 to £500 million arising from the effect of shopping out. That is excluding the effects of smuggling, that is simply the revenue effect of legitimate shopping out. There would be around 10,000 job losses this year, and a loss of GDP of around £900 million. So our view is that those disadvantages to the UK economy, which are a product of the absence of a rebate or subsidy—and I agree it is not worth trading semantics—largely offset the costs of the provision of the rebate. Our original view prior to the Budget was that it would require an adjustment of less than 2p a litre overall to the price of fuel, taking account of the re-collection of fuel duty by the Chancellor under this regime, to entirely balance the equation. So it does not have to be a remedy of enormous cost to the Exchequer.


  217.  I asked a general question at the beginning which got us off the ground, let me ask one or two supplementary questions arising out of the evidence you have given to myself and my colleagues. You mentioned that you had your first meeting with the Treasury within the last week, but that was obviously on the general national problems, has there been any approach by either of your associations to the Northern Ireland Office to discuss these issues? I infer there has not been any contact with the Treasury.
  (Ms Smith)  Certainly from the RHA position we are currently trying to get a meeting set up with the Northern Ireland Office to discuss this.

  218.  But have not had one so far?
  (Ms Smith)  No.
  (Mr Norris)  We have viewed this as a Treasury issue, Chairman, because recognising the difference of opinion between the Northern Ireland Office and the Treasury as to where responsibility for this lies, we have been very clear that, certainly on the mainland, the DETR has no effective responsibility in this area, it is overwhelmingly a Treasury and duty-related issue. We have a very good relationship with the Northern Ireland Office and enjoy extremely cordial relations with them on all other matters relating to road haulage, but this we have seen as a Treasury issue.
  (Mr Armstrong)  Indirectly we have raised the issue with the Northern Ireland Office through our membership of the CBI.
  (Mr Norris)  Yes.

  219.  Can I clarify, in terms of the exchange you have just had with Mr McCabe, the order of your solutions, the prioritisation of your solutions, to use an ugly word? Am I understanding it right that your first preference is for harmonisation of taxes and only if you do not secure a harmonisation of taxes do you want a user rebate?
  (Mr Norris)  I can speak for the Road Haulage Association, Chairman, and we would assent to that proposition. Harmonisation is ideal because it levels the playing field within a single market. If we are not to have general harmonisation, then specifically where an element of competition is relevant to a product, and it clearly is in road haulage, you need to have the level playing field by means of a specific industry rebate. Incidentally, there is a precedent for that, of course, there is a thing called fuel duty rebate which is paid to public transport operators. There are other precedents in other countries, the French, as I say, have a fuel duty rebate.

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