House of Commons - Environment, Transport and Regional Affairs

Select Committee on Environment, Transport and Regional Affairs Fifteenth Report

THE ROAD HAULAGE INDUSTRY

FINANCES OF ROAD HAULAGE IN THE UNITED KINGDOM

20. In Sustainable Distribution: A strategy, one of the 'daughter documents' of the Integrated Transport White Paper, the Government sets out its definition of a sustainable transport market. It says that "in a sustainable market decisions are taken in cognisance of their wider impact, and decision-makers act responsibly with respect to society as a whole, both today and over the longer term. In order for this to happen it is important that the market should properly inform decision-makers as to the wider costs which they are incurring in taking their decisions - and not only those costs which bear directly upon themselves".[75] This definition reflects the view elucidated in the Transport Green Paper published by the previous Government in 1996, that "it is economically efficient for the transport prices paid by an individual transport user to reflect all the economic costs, including the cost of road provision, environmental and other costs of the individual's transport decision ... This forces transport users to take into account all the costs and benefits of their travel decisions, and adjust their behaviour accordingly".[76] Similar comments were made by the European Commission in a Green Paper published in 1995.[77]

21. At first glance, the road haulage industry appears not to set its prices according to the guidelines of a sustainable market, since each haulage company only has regard to its internal costs, such as labour, fuel, vehicle depreciation and maintenance. The wider costs imposed by the industry, such as wear and tear to road surfaces and to structures such as bridges, its contribution to congestion, and the grief, suffering and lost output which results from accidents involving lorries,[78] are not accounted for by hauliers. There are other external costs, too, such as the impact of vehicle emissions on local air quality, public health and climate change, and the nuisance, noise and congestion caused by heavy goods vehicles on pedestrians and motorists, including hauliers themselves.[79]

22. However, some of the external costs imposed by the haulage industry are already recovered from hauliers directly through mechanisms such as insurance premiums, national insurance contributions, and taxes levied on all businesses, such as corporation tax. These go some way towards meeting external costs, such as the costs of accidents. Even so, the Government argues, "typically these [external] costs are not directly apparent to the transport purchaser or operator, at least in the short term".[80] Consequently it has over a number of years pursued policies which attempt to force road haulage companies to 'internalise', or directly pay for, all of the costs they impose on the wider community and on the environment, and thus to alter their behaviour to minimise such external costs. Its principal means of doing so have been by imposing fuel duty and Vehicle Excise Duty (VED), and by seeking to regulate the industry.

Fuel duty and Vehicle Excise Duty

23. Successive Governments have, over a number of years, used fuel duty and VED to "promote fair and transparent pricing through taxation".[81] The primary mechanism by which they have done so is through a commitment from 1993 to raising fuel duties by at least 5 per cent in real terms each year,[82] a policy known as the fuel duty escalator. The objective of the escalator was to ensure that "motorists should bear the full costs of driving - not only wear and tear and congestion on the roads, but the wider environmental costs",[83] and also generally to reduce the use of road transport. The present Government, elected in 1997, decided to retain the escalator, and increased its rate to 6 per cent per year from 1997,[84] a rate continued in the Budgets of 1998 and 1999.[85] The 1998 Budget also increased the difference in the price of ordinary and low-sulphur diesel to two pence per litre,[86] to encourage hauliers to switch to the 'cleaner' fuel.

24. VED is levied on all vehicles, and has been intended to meet some of the external costs imposed by road transport: the revenue raised through VED has commonly been thought to contribute to road and bridge maintenance. Rates of VED for lorries are in any event higher than those for other vehicles to reflect the greater damage they cause to the infrastructure.[87] The Government has also sought to use VED specifically to penalise hauliers who use particularly damaging lorries, and thus to encourage them to switch to other vehicle types. For example, the 1997 Budget introduced a rebate of £500 on VED for lorries which meet stringent emissions standards,[88] and the 1999 Budget established different rates of VED for vehicles of different weights and different numbers of axles, to reflect the degrees to which each damages the road surface. Therefore VED for 40 tonne, five-axle lorries, which had only been allowed on the United Kingdom's roads from 1 January 1999, was set at £5,750. This was because they cause more than 30 per cent more damage to the road than five-axle vehicles operating at 38 tonnes, the previous maximum weight, and the duty was set, the Government said, "strongly to discourage their use at this weight".[89] By contrast, VED for 41 tonne 6-axle lorries, which cause much less road damage, was set at £2,500.[90]

Regulations

25. Governments have also sought to use regulations to ensure that haulage companies themselves pay for some of their wider costs, and alter their behaviour to minimise such costs.[91] Until 1968, access to the road haulage industry was controlled, and the prices charged by hauliers were regulated. The Transport Act 1968 liberalised entry to the market, and switched the focus of Government regulation to ensuring that operators meet certain safety and other standards,[92] so that, as the Department of the Environment, Transport and the Regions told us, "regulation focuses on quality and safety".[93]

26. Thus drivers of medium-sized and heavy vehicles are licensed separately from, and to different standards than, other drivers, following provisions set down by the European Union.[94] The Traffic Commissioners[95] issue operators' licences ('O-licences') to individuals and companies who wish to operate goods licences which weigh over 3.5 tonnes. Their objective is to ensure the safe use of goods vehicles and fair competition between operators, and before issuing a licence a Commissioner must be satisfied that the applicant is fit to hold it,[96] has a suitable depot with proper maintenance facilities and sufficient finance to keep the vehicles roadworthy.[97] The decisions of the Traffic Commissioners are in part based on European Union legislation relating to the good repute of operators, their financial standing and their professional competence,[98] which requires, for example, that operators or their transport managers must pass a Certificate of Professional Competence (CPC).[99] The Government has also aligned regulations governing the construction and use of lorries with relevant European Directives, and thus the brakes, suspension, weights, dimensions, and so on are controlled.[100] The European Union, and the Government, as we have already said, have also introduced regulations to limit the environmental impact of vehicles. There are further regulations which affect drivers' hours, speed limiters on vehicles, and the transport of dangerous goods.

The 'true' cost of road haulage

27. Those who argue in favour of rail freight claim that rail freight operators pay a much higher proportion of their true costs than road hauliers, for a number of reasons. First, the charges levied by the rail infrastructure provider take account of the wear and tear on the system imposed by freight trains. Second, rail freight causes much less damage to the environment, particularly in terms of emissions, than road haulage. Third, rail enjoys a much better safety record than the road haulage industry, so the social costs it imposes through accidents are considerably less.[101] All of these wider social and environmental benefits are in effect 'purchased' by rail operators through much more expensive vehicles and infrastructure. As the Rail Freight Group told us, "compared with rail freight ... the lorry also causes much greater damage to the environment than rail freight, and pays very much less".[102] In short, it is frequently argued, rail freight cannot compete fairly with the road haulage industry because it pays directly for many of the wider costs it imposes, and so the rates it must charge are much higher.[103] Supporters of rail freight argue that higher rates of VED and fuel duty, coupled with grants to encourage rail freight, are the only way to enable the road haulage and rail freight industries to compete on a more even basis.

28. The Rail Freight Group and Freight on Rail, in their evidence to us, tried to quantify the degree to which road haulage rates do not reflect the true costs of the industry's activities. Both quoted research into the matter has been carried out by Oxford Economic Research Associates (OXERA),[104] which found that the damage caused by heavy goods vehicles to roads has historically been under-estimated, that the Government, in setting taxes for road hauliers, had failed to take account of the capital value of the road network, and that taxes currently levied on heavy goods vehicles cover only 69 per cent of their full social and environmental costs.[105] The Rail Freight Group also pointed to research which found that if lorries in France complied with all legislation which applied to them the costs of road transport would rise by 30 per cent,[106] and concluded that similar figures would apply to the United Kingdom. Such suggestions were not however accepted by other witnesses: the Road Haulage Association told us that the figures quoted in the OXERA Report "are figures which one could dispute and could debate",[107] and the Deputy Director General of the Freight Transport Association stated flatly that he did not believe the figures.[108]

29. The Government, for its part, says that quantifying a 'fair' price for road freight is far from easy.[109] As it says, "different approaches to estimation [of the true cost of road freight] ... can produce substantially different figures".[110] Nevertheless, it has attempted to establish a 'fair' price, and thus a sustainable market, through the fuel duty escalator, through VED, and through regulations applying to the industry. The response of the road haulage industry has been to mount a vociferous campaign to reduce the burden of taxation on the industry. That campaign was continued in much of the evidence we received, a great deal of which focussed on the fuel duty escalator, and on the level of VED for lorries.

The industry's reaction to rising fuel duty rates and the level of VED

30. For the first few years after the implementation of the fuel duty escalator, its effect on fuel prices was mitigated in part by the fact that the cost of crude oil was generally fairly stable or falling. Between 1993 and the end of 1998 the price of Brent crude oil, for example, fell in real terms by approximately 40 per cent, and in cash terms its price declined by 33 per cent during 1998 alone.[111] Indeed, oil prices fell by 25 per cent in the six months leading up to the 1998 Budget.[112] However, during 1999 the price of crude oil "increased significantly",[113] going up by 25 per cent,[114] and recent rises have resulted in the price of Brent crude oil increasing by a further 54 per cent. In cash terms, current prices are almost twice what they were during 1998.[115]

31. Despite the fact that during the past seven years crude oil prices have decreased as well as risen, there has been no halt in the steady increase in the retail price of diesel. From 1994 until 1999 it rose in cash terms by between 5.3 and 8.7 per cent each year, increases which were above the rate of inflation.[116] The sharp rise in the price of crude oil in the Spring of 1999, coupled with the continuation of the fuel duty escalator in the Budget of that year, led to a particularly dramatic rise in the cost of fuel: between 1999 and 2000, the average price of diesel rose by 14 per cent.[117] A number of our witnesses claimed that the fuel duty escalator alone accounted for a rise in the price of between ten and eleven per cent.[118] The Road Haulage Association has claimed that such rises in fuel prices, together with high levels of VED, threatened to ring "the death knell for over 53,000 jobs in the UK haulage industry".[119]

32. What concerns hauliers is the fact that fuel duty and VED rates in the United Kingdom are markedly higher than in other European countries, and thus that United Kingdom hauliers are less able to compete with their European rivals. The Road Haulage Association told us that "the United Kingdom has by far the highest diesel duty rate in the whole of the European Union. In addition, rates of Vehicle Excise Duty for the heaviest lorries (40 tonnes ...) are up to twelve times more than that of our nearest European rival".[120] The Association compared fuel duty of 50.2 pence per litre for diesel, or 47.2 pence per litre for ultra-low sulphur diesel, with duties in other European countries which range from 15.4 pence per litre in Greece to 25.5 pence per litre in Italy.[121] It also pointed out that the VED rate for 40 tonne, five-axle lorries, of £5,750, was two-and-a-half times more expensive than the next highest cost, charged by Austria, thirteen times the rate in France, and twenty-one times the duty levied by Portugal.[122] The Freight Transport Association compared the average amounts paid in fuel duty and in VED on a 40 tonne, five-axle lorry each year, and found that the lowest annual charge was £6,774 in Portugal, and the highest in Europe outside the United Kingdom were in France, Germany and Italy, all of which charged just over £10,000 a year. In the United Kingdom the total duty paid was over £25,000 each year.[123]

33. As the Association told us, however, disparities in the duties levied by European Union Governments have in the past been of concern only to hauliers operating internationally on a regular basis. As a result, such companies have "adapted their business practices and now purchase nearly all their fuel abroad",[124] in order to mitigate the effect of high duties at home. The reason why hauliers have become particularly anxious recently about the rates of duty charged in the United Kingdom is that since 1 July 1998 restrictions on the operation of road haulage services by non-resident individuals or companies within a member state of the European Union, or cabotage, have been lifted.[125] Consequently vehicles registered and based outside the country can now compete directly with United Kingdom hauliers for domestic business. The Road Haulage Association told us that because they are registered abroad, operators of these vehicles avoid paying United Kingdom rates of VED, and because each lorry can carry enough fuel to travel approximately 2,000 miles, foreign vehicles can fill up at a cheaper rate at home, then come to the United Kingdom to operate at a much lower cost. The Association told us that "the much lower price of fuel available to continental-based hauliers has given them a competitive edge. Continuing increases in fuel duty will simply widen this advantage ... As fuel on the Continent becomes cheaper (relative to the United Kingdom) domestic operations within the United Kingdom will become increasingly attractive since continental-based haulier will find it easier to offer lower rates compared to United Kingdom hauliers".[126] Moreover, the Association told us, Government policies towards VED and fuel duty encouraged increasing numbers of foreign hauliers to operate their vehicles, and use less clean fuel brought from abroad, in this country, inflicting environmental damage and wear and tear to the roads, without paying any tax in the United Kingdom,[127] an outcome which directly undermined the objectives of a sustainable market.

34. The concerns expressed by the Road Haulage Association were shared by many of our witnesses. The Freight Transport Association told us that "the haulage industry is suffering under the highest fuel and excise duty rates in Europe. This is threatening its future existence because of the potential of lower-taxed foreign competition".[128] The Shadow Road Haulage Forum pointed out that "in the United Kingdom, the pump price of diesel is now about 27 pence more expensive than the European Union average - that is a huge 53 per cent more expensive. Yet the pre-tax price of United Kingdom diesel is the same as the European Union average. It is tax, therefore, that makes all the difference".[129] Lacey's Freight Services said that "foreign hauliers are now free to 'muscle in' on our domestic haulage market, bringing their own cheaper diesel ... [and] paying less in road tax, they are able to drastically undercut our own hauliers' cost".[130] Andrew Malcolm, of the Malcolm Group, said that "cabotage today is an escalating problem and one which is causing us all a great deal of pain".[131]

35. We were given evidence of individual instances of United Kingdom hauliers losing business to foreign-based companies. The managing director of the Reed Boardall Group cited an example of a customer who had turned to a Dutch competitor which charged rates equivalent to two-thirds of those of his company.[132] The chairman of the Potter Group told us about a manufacturing business based in Cheshire which had begun to use a foreign operator to transport goods to London: the quantity involved was 40,000 tonnes of goods each year.[133] The National Chairman of the Road Haulage Association said that a particular company based in Ipswich had turned over a quarter of its transportation needs to foreign hauliers.[134] However, we heard little evidence of widespread penetration of the domestic market by foreign operators: the Road Haulage Association conceded that "the actual percentage figures [of the amount of cabotage performed by foreign operators in the United Kingdom] are relatively low ... [but] the main issue is not so much the quantity, it is the threat ... which hangs over the indigenous United Kingdom industry".[135] The Government's survey of foreign-registered lorries, conducted between January and February 2000, found that although 68 per cent of foreign-registered lorries which entered the United Kingdom picked up goods to carry back out of the country, only 0.06 per cent of domestic haulage is carried out by foreign-based companies.[136]

36. Another measure of the impact of relatively high fuel duties and VED rates might be the degree to which United Kingdom hauliers choose to register their vehicles in other European states (or 'flag out') in order to benefit from lower duties, particularly VED. The Road Haulage Association argued that "the consequence of the Government's current taxation policies is forcing many United Kingdom hauliers to consider registering their businesses and vehicles abroad in order to benefit from the lower levels of VED and fuel duty".[137] It said that more than 300 companies, operating in total more than 3,000 vehicles, had already flagged out.[138]

37. In general, though, there appears to be some confusion about the degree to which flagging out has already occurred or is likely to take place in future. There is clearly a particular problem in Northern Ireland, where there is ample opportunity for hauliers to re-register companies and vehicles in the Republic of Ireland.[139] Lord Whitty told us that 5,000 lorries from Northern Ireland had been registered in the Republic.[140] We were also told that Eddie Stobart has chosen to base a hundred lorries in Belgium rather than in the United Kingdom to counter the measures contained in the 1999 Budget.[141] The chairman of the Potter Group cited cases of companies in North Yorkshire which had chosen to flag out.[142] The Freight Transport Association, however, told us that discussion of "flagging out ... has possibly been one of the biggest wastes of time in the industry in recent months because it has proved to be legally difficult and operationally difficult, apart from a few selected companies. As far as we are concerned, it is not a productive avenue to follow".[143] The Government told us that flagging out was a complicated process,[144] and that although a total of between 5,000 and 10,000 lorries had been registered abroad, "that is not a big impact on the total number of lorries on the road ... it is also true to say that the comparative competitive advantage which the hauliers expected from flagging out has by and large not materialised".[145]

Solutions proposed to the difficulties facing the industry

38. The Road Haulage Association suggested a number of ways in which the tax burden on the industry might be relieved. Their main proposal is an Essential User Rebate on fuel, which the Association first put forward after the 1998 Budget.[146] The rebate would be given for 'essential users', defined as hauliers operating within the O-licencing system, on fuel used for business purposes. The rate of the rebate would be equivalent to the difference between the level of fuel duty in the United Kingdom and the average level of that duty in member states of the European Union, and the amount to which each haulier would be eligible would be calculated by scrutinising tachograph records.[147] The Association said that the Essential User Rebate would better enable British hauliers to meet European competition, and would bring safety benefits because hauliers would be encouraged to obtain an Operator's Licence.

39. Although the Essential User Rebate was the Road Haulage Association's preferred means of lowering the tax burden on the industry, it noted two other suggestions that had been made to achieve the same end. One possibility would be to designate part of the fuel supply as 'commercial diesel', allowing a different rate of duty to be charged for fuel to be used for commercial purposes.[148] The other would be to treat fuel as a tax-deductible business expense for hauliers, permitting hauliers to claim back fuel duty for operations carried out for commercial reasons.[149] If the Essential User Rebate could not be established, the Association said that it would not rule out these options: likewise, a number of those from whom we took evidence also supported the Essential User Rebate or, if it could not be established, options such as 'commercial diesel' or treating fuel as a tax-deductible business expense.[150] The Freight Transport Association told us that the Chancellor of the Exchequer should "de-couple the fuel duty rate for commercial vehicles from that for other vehicles so as to allow future tax policy to differentiate between essential users of diesel fuel and those with alternative means of transport".[151]

40. There seems to be little difference between the introduction of an Essential User Rebate, the supply of 'commercial diesel', or making diesel tax-deductible: all would have the effect of cutting fuel duty paid by haulage companies. As such, it is perhaps not surprising that a number of our witnesses also simply called for fuel duty to be cut. The Malcolm Group told us that it would like to see "a decrease in fuel duty working towards parity with other EEC [sic] countries on price paid".[152] The Potter Group said that "fuel duty should be more in line with Europe".[153] The Road Haulage Association said that although the Essential User Rebate was its preferred option, it "certainly would not rule out other options designed to achieve the same objective [such as] to bring the United Kingdom's diesel rates into line with those of our European competitors".[154]

41. The Road Haulage Association also argued that the way in which VED is calculated is unfair. It said that current rates of VED "more than cover the road track costs of heavy goods vehicles":[155] in other words, that the amount of VED collected from the operators of heavy lorries more than compensated for the damage caused by their operations. The Association called for "an urgent revision in the method used by Government to calculate VED",[156] implying that the VED rate should be much lower. That view was supported by others: Lacey's Freight Services said that "VED should be reduced to a comparable European level",[157] whilst the Freight Transport Association told us that the Government should "reduce VED rates, particularly for those vehicles most vulnerable to lower-taxed foreign competition".[158]

42. A particular concern of a number of those who gave evidence to us was, as the Road Haulage Association pointed out, European hauliers entering the United Kingdom do not have to pay VED, whereas domestic hauliers do, even though each causes damage to the road and to the environment. The Association said that VED "penalises United Kingdom hauliers using United Kingdom roads whilst allowing foreign-registered hauliers' vehicles to use (and inflict wear and tear on) United Kingdom roads free of charge".[159] As a result a number of memoranda we received were in favour of a levy, or 'vignette', to be charged on foreign hauliers entering the United Kingdom, on the grounds that they should meet some of the costs they impose by operating in this country.

43. The vignette[160] would take the form advocated by the Rail Freight Group, which is that both United Kingdom and foreign lorries operating in the United Kingdom would pay an annual fee to use our roads.[161] Under European Union law the fee cannot only be levied on foreign lorries entering the United Kingdom, but must be imposed on all lorries, whether based in the United Kingdom or abroad.[162] However, once the vignette was introduced VED in the United Kingdom could be reduced by an equivalent amount, meaning that domestic hauliers would not face a higher tax total burden.

44. The Government told us that at first it had thought that the vignette was a very attractive idea.[163] It noted that Germany, the Netherlands, Belgium, Luxembourg, Denmark and Sweden already operated successfully a joint 'Eurovignette', under which a single payment gave access for hauliers to motorways in all six countries.[164] However, the Government was concerned that the revenue raised under any vignette scheme might be outweighed by the cost of administering the scheme. Vignettes, tolls and road user charging are governed by a European Directive,[165] which comes into force on 1 July 2000. The Directive permits maximum annual charges for larger lorries of between _1,550 and _1,250, depending on the emission standards they meet,[166] and also sets maximum daily, weekly and monthly rates.[167] It also makes clear that a vignette can only be charged for use of the motorway and principal road network, rather than applying to all roads.[168] In addition, the Directive sets minimum rates of VED, which means that if VED is to be reduced to account for charging domestic hauliers for an annual vignette, and if domestic hauliers are not to be worse off under the vignette system, the maximum annual vignette would be only approximately £75.[169]

45. By restricting the vignette to five-axle lorries the Government estimated that the annual revenue from the scheme could be £4.9 million.[170] The cost of establishing a vignette system would be "significantly over £10 million",[171] and there would be on-going costs in terms of issuing permits, receiving and accounting for money, and enforcement. In short, Lord Whitty told us, the Government was concerned that "the cost of administering that [vignette system] would be more than the money that came in",[172] although the Government did acknowledge that "foreign lorries would be charged for the use of the major roads in the United Kingdom. They would also contribute to the track costs which they impose".[173] Although the Government did not put it forward as a reason for a vignette scheme, such a scheme would also increase the operating costs of foreign hauliers in the United Kingdom, albeit marginally, thus improving the competitiveness of British hauliers.

The 2000 Budget

46. In the pre-Budget report of November 1999, the Chancellor stated that the fuel duty escalator was to end,[174] and that the revenue from any future increases in fuel duty above the level of inflation would be ring-fenced for transport projects. In the Budget, which occurred during our inquiry, the Chancellor noted also that oil prices were rising rapidly, and said that there would therefore not then be any rise in fuel duties beyond inflation.[175] In addition, the Budget reduced VED rates for 38 tonne and 41 tonne lorries by £500, and for 40 tonne, five-axle lorries by £1,800, to £3,950.[176] It also froze VED rates for other types of lorry. The Chancellor's decisions, which led to savings of £45 million on VED for the road haulage industry,[177] raised feelings of "cautious optimism" at the Road Haulage Association.[178]

The total tax burden

47. It has been argued even before the cuts in fuel duty and VED announced in the Budget that the total tax burden on United Kingdom hauliers is not greatly higher than on hauliers from other European nations, because of our lower rates of corporation tax, lower social costs and the fact that tolls and other charges are levied for the use of many European roads. Once those were taken into account, Lord Whitty told us, it was not clear that companies based in the United Kingdom were at a significant disadvantage to those based in European countries: indeed, he told us that "taking total operating costs, including taxation, [into account] with Belgium and the Netherlands, we are very much on a par. There was probably a slight advantage ... [for companies based in] France but not enormous ... that is our general impression".[179] The Road Haulage Association, however, contested this view, claiming that it under-estimated the importance of fuel costs and the level of VED to haulage companies. The Association had concluded that the typical annual operating costs for a 40-tonne, five-axle lorry, when compared to the United Kingdom, were 3 per cent cheaper in Belgium, 7 per cent less in the Netherlands, and ten per cent cheaper in France.[180] That said, the Association's figures pre-dated the announcement in the 2000 Budget that VED would be cut for 40 tonne, five-axle lorries.

Low haulage rates

48. Others of our witnesses suggested that the profitability and viability of the road haulage industry was not threatened by high rates of fuel duty and VED, and thus by competition from foreign-based companies, but by over-capacity within the industry. Such over-capacity, we were told, gives rise to unsustainably low haulage rates, which in turn prevent companies passing on increases in their costs, such as the rises in fuel duty, to their customers, as would occur in other circumstances. The Rail Freight Group told us that "low levels of profitability are due to over-supply within the industry and the low level of entry cost for new operators ... during much of the past decade there have been too many vehicles chasing too little business. This has resulted in rates that have probably changed little during that period".[181] We were told that deregulation has made the industry too easy to join: the managing director of the Reed Boardall Group pointed out that "it is very easy for the person [entering the industry] to purchase a vehicle ... [and] he is inevitably initially prepared to work for less money for himself than he would for others so he underprices the job. That has the effect of reducing prices in the marketplace".[182] This view was shared by other witnesses, including Eddie Stobart and Lord Whitty.[183]

49. To counter the problem it was suggested that the conditions which must be met before the Traffic Commissioners will issue an O-licence should be stiffened. The managing director of the Reed Boardall Group told us that the requirement that individuals or companies must show sufficient financial probity to ensure that they can afford properly to maintain their vehicles should be increased: at present a person seeking an O-licence is required to show that they have access to approximately £6,300,[184] and he said that £20,000 was a more appropriate figure.[185] Our witness from Christian Salvesen agreed that the figure should be increased, but said that £20,000 was probably too low.[186] Lord Whitty assured us that this was a matter which was currently being reviewed by the Government and by the Traffic Commissioners.[187]

Conclusions and recommendations

50. Hauliers are clearly aggrieved by policies such as the fuel duty escalator and high rates of VED for certain types of lorry, and are concerned about the impact they have had on their businesses. We broadly support the principles which have underpinned the Government's taxation policies towards the road haulage industry, although such policies should be applied in a sensible and pragmatic way. Transporting goods by road does impose social and environmental costs which extend beyond the immediate concerns of hauliers, and we believe that it is appropriate for the Government to attempt to establish a sustainable market, using fuel duty and VED to force hauliers to take those costs into account, to alter their behaviour in terms of the amount of use they make of their vehicles, to encourage them to use cleaner fuels, more efficient engines, and less damaging axle-loads, and to provide support for the rail freight industry.

51. Nevertheless, the Government must be pragmatic: after all, its objectives would be undermined if its policies threaten the viability of domestic hauliers, and encourage greater numbers of foreign haulage companies, which may not meet United Kingdom safety or environmental standards, to operate in this country. In particular we believe that the imposition of high levels of fuel duty, in an attempt to create a sustainable market for road freight, should be tempered by changes in fuel prices, rather than being an automatic escalator even when oil prices are themselves rising sharply. For that reason, we welcome the Government's decision to end the fuel duty escalator, particularly in light of rapidly rising oil prices. We also welcome the decision to ring-fence the revenue derived from future real increases in fuel duty for a fund for transport projects. Nevertheless, we are concerned that the Government's decision might discourage the carriage of goods by rail. We therefore recommend that a part of the new fund for transport be reserved for projects which will bolster the rail freight industry.

52. The profitability and viability of road haulage companies are undermined by the long-standing problem of very low haulage rates. There appear to be three reasons why those rates are kept so low: entry to the industry is too easy, companies face competition from hauliers based in other European countries, and some companies within the industry routinely ignore regulations followed by others in order to gain an advantage, a point we return to below. We believe that hauliers should be able to raise their rates to pass on their true costs to their customers, and ultimately to the consumer. We therefore recommend that the financial conditions which must be met before hauliers are granted an O-licence be increased substantially to ensure that new entrants to the industry are not financially unviable companies able consistently to undercut existing operators. It is important nonetheless that barriers to entry to the industry should not unduly deter smaller operators in favour of larger companies. The road haulage industry must remain a fully open and competitive one.

53. The industry's primary concern is that high rates of fuel duty and VED have made it uncompetitive relative to European hauliers which are now allowed to undertake cabotage within the United Kingdom. Although we did not receive compelling evidence that haulage companies based in the United Kingdom have already lost significant business to foreign competitors, we acknowledge that the threat to domestic hauliers is real. However, as we have said, we broadly support the principle which lies behind the Government's policies in respect of fuel duty and VED, although we believe that it should be pragmatic in their application. We do not therefore support measures such as the Essential User Rebate, the designation of 'commercial diesel', or treating fuel as a tax-deductible expense for hauliers, or an across-the-board reduction in VED, which are designed to relieve the tax burden on haulage companies. It is our contention that the Government is broadly right to seek to ensure that the road haulage industry meets all of its social and environmental costs, and to attempt to alter the behaviour of haulage companies, through its taxation policies. It should not abandon such policies simply because the Governments of other European Union member states have not followed its example, although it should respond flexibly to changes in circumstances such as rapidly rising oil prices.

54. However, we believe that it is absurd that British hauliers operating abroad must pay tolls and vignettes, which help to maintain roads in other countries, and that no charge is placed on foreign-based hauliers entering this country. Such a situation is not fair to United Kingdom hauliers. Therefore, although we recognise that there may be difficulties in administering the system, we recommend that the Government introduce a charge, or vignette, to be levied on all hauliers, including foreign operators entering the United Kingdom, in order that they should meet at least part of the cost of repairing the damage they cause to our roads and to our environment. We recommend that VED is reduced by an amount equivalent to the vignette. We note the Government's concern that European Union law limits the amount which can be charged for a vignette, and therefore that the income from the system might not cover the cost of administering it. In order to minimise the cost of administration, we suggest that vignettes should be made available for purchase at, amongst other places, ports, and should permit lorries to display a disk which in turn permits their use of the motorway network. Enforcement of the system should be the responsibility of the police and the Vehicle Inspectorate as part of their duties to inspect heavy goods vehicles. If, even so, the cost of administering the system remains higher than income from it, we recommend that the Government, if it believes that the cost of the vignette should be higher than the current maximum, urgently explore all avenues, including seeking changes to European law, which will make a higher charge possible.

75 See Sustainable Distribution: A strategy, para.4.15. Back

76 Transport: The way forward, Department of Transport, April 1996, Cm 3234, para.8.10. Back

77 Towards fair and efficient pricing in transport, European Commission, COM (95) 691 Final 1995. Back

78 See Sustainable Distribution: A strategy, para.4.17. One of our witnesses, Freight on Rail, told us that although heavy goods vehicles accounted for only 7 per cent of vehicles on the road, they account for 17 per cent of casualties - in 1998, we were told, they killed 576 people. Back

79 See Sustainable Distribution: A strategy, para.4.18. Freight on Rail quoted figures which suggested that congestion alone costs the economy £20 billion each year (see Q.443). Back

80 Sustainable Distribution: A strategy, para.4.18. Back