Examination of Witnesses (Questions 160
- 179)
WEDNESDAY 1 NOVEMBER 2000
MR R KING,
MRS K LEEMING
AND PROFESSOR
D MCWILLIAMS
160. What you seem to be saying is that the
industry is carrying an ever-increasing amount of goods with a
decreasing number of vehicles which seems to indicate to me that
your industry is getting more and more efficient. That is the
problem.
(Professor McWilliams) That is technically the case.
However, the industry is passing on the cost savings to the customers,
that is the problem for the industry, and more than passing them
on probably. We do not have figures now to take account of what
has been happening to profitability since we had the big rises
in the price of oil, so we do not yet know what the latest profitability
position is. I should be very surprised if we do not find that
a number of firms in the industry are now making losses as a result
of what has just happened in the past few months.
Mr Butterfill
161. You commissioned this research by the Centre
for Economics and Business Research Ltd (CEBR) and they produced
Table 1 in your memorandum on the impact on tax revenue of diesel
price differential on different assumptions; one was assuming
there was a price differential of 31.9 pence/litre and the other
no difference. Their table purports to show that the Treasury
would be better off if they eliminated the price differential.
You make some assumptions about the level lost through cabotage,
loss of international business for UK hauliers, loss from Northern
Ireland cross-border fuel purchases and there is a macro impact
of job losses of £810 million. What assumptions were made?
Since you have not been able to show us what the job losses were,
what assumptions did they make or did they do some research which
you did not do?
(Mr King) Professor McWilliams who did the research
might be able to reply to that.
(Professor McWilliams) We did the research and the
assumptions we made were built in there. If you want to know the
jobs number, the jobs number which went in there was the jobs
number in total for the industry and the knock-on effect of 47,000
jobs. That is a number we produced, it is a number which is consistent
with numbers we produced in earlier reports which were published
in full and are nothing we are very shy about. We have run that
estimate through our model which runs in many ways much the same
way as the Treasury model. Obviously what you get out of these
things depends on the assumptions you make but that was the considered
estimate of the macro impact.
162. I am just concerned that you have not been
able to give us any figures of actual job losses and yet you presumably
made some assumptions for this and I wondered how you based them.
(Professor McWilliams) This is not a number of actual
job losses. This is a difference between the number of jobs there
would be in one hypothetical set of circumstances where the excise
duties in the UK were the same as on the continent compared with
the number of jobs we think there actually are.
163. I just wondered how you based that assumption.
(Professor McWilliams) It is a model based calculation.
Like all these simulations, whether done by people in government
or wherever, they are subject to all the problems of making estimates
that we all have, but it is the best estimate we could make. Remember
it is the difference between a gap now of over 30p and a gap of
zero. At the moment I do not think anyone is really seriously
considering the possibility that in the short term the gap will
be brought down to zero, so in a sense that is why the number
is on the large side.
164. Were you using the Treasury model?
(Professor McWilliams) No, we used our own model because
it is much easier to use and frankly you get the same results.
The differences in the results you get from using models do not
come from the different models, they come from the different assumptions
you feed in when you are doing it.
Mr Chope
165. Were these the figures which were presented
to the competitiveness working group organised by the Government
which the RHA says in its memorandum were discussed with a meeting
with Government officials where they had the opportunity to scrutinise
the base data and to question you on the methodology employed
and that that examination established the validity of your data?
Is this the data we are talking about and is that accepted as
valid by the Government's own officials?
(Professor McWilliams) The data which was discussed
was the same thing but a year earlier on the numbers which existed
a year earlier. Obviously the numbers have been updated since
then but the underlying methodology has not changed. It was essentially
the underlying methodology that we had 17 different Government
officials testing, including two from the Treasury and at the
end they retired feeling they had not scored very many points.
Helen Southworth
166. The Government has maintained that whilst
the UK has higher fuel duties overall tax is comparable if not
favourable in the UK against other European countries. What do
you think about the concept of taking the entire burden of taxation
against GDP rather than looking purely at fuel tax when you are
evaluating these things?
(Mrs Leeming) When you are considering this the important
thing to remember is yes, of course certain elements of taxation
are lower in other countries. Given that fuel tax often represents
30 per cent, it is a bigger element, so that is where we think
the uncompetitiveness is coming from.
167. What about lower social costs, employment
taxes, corporation taxes? The OECD figures put taxation levels
as a proportion of GDP in the UK at around 40 per cent compared
with 58 per cent in Sweden, 50 per cent in France and 44 per cent
in Germany.
(Mrs Leeming) That might be the case, I am afraid
I am not an expert on that particular element.
(Professor McWilliams) These OECD figures are absolutely
correct and it is perfectly true that the overall tax burden in
the UK is low by European standards, higher than in the States,
quite a lot higher than South East Asia. These are well known
and well understood numbers and I do not think anyone would seriously
argue with them. As far as the calculation is concerned for working
out how many foreign lorries are likely to be coming into the
UK—and the number last year was 884,000—which had
gone up from 390,000 in 1992; a huge increase and even last year
the increase was about 25 per cent—what is relevant for
that is not the total tax burden but the marginal tax burden.
At the margin, once they have paid all their taxes, it makes sense
to try to take advantage of the fact that they can get the cheap
fuel. That essentially is what seems to be driving this business
at the margin. It is the marginal comparison rather than the average
comparison which is relevant for predicting that. The model we
used to work out what the jobs impact might be, what the impact
on international usage might be and so on, that model took all
these factors into account and predicted, when we ran it a year
ago, that the number of foreign lorries coming into the UK would
be 799,000 and that was based on the numbers we have just been
discussing so far. We are a year on. We know what the numbers
actually have been. The number was 884,000, in other words we
were underestimating by ten per cent. That is pretty supportive
of the fact that the underlying view that cheap fuel prices on
the continent, combined with other things like the value of the
euro as well, would encourage foreign lorries into the UK. That
is what has actually happened.
Mr Morgan
168. What would the radius of operation of a
modern lorry landing at Dover be if it came with a full tank before
it has to refuel?
(Mrs Leeming) Legally they can carry about 1,500 litres,
so well over 1,000 miles.
Mr Butterfill
169. It is not going to be any consolation to
businesses struggling to make any taxable profit at all that corporation
tax is lower in this country.
(Mr King) I did not want to say that. The difference
between the tax take of a European haulier and a UK one is that
the most significant element of tax that the UK haulier has to
pay is one he is paying every time he turns the wheel of the truck.
It is not something which happens once a year or happens at the
end of the month when he pays the staff. He has to keep paying
that high level of tax and one of the difficulties faced of course
is that the oil companies will want payment for that fuel most
often well before that company, that haulier, actually has payment
from his customer. The rapid increase in fuel price which has
almost doubled the direct operating costs in the space of the
last 18 months or so has to be paid for before he in turn gets
paid. That is where the real problem exists, that little matter
of affording the fuel bill.
Mr Cunningham
170. You touched on the impact of the euro on
this. Can you give us a bit more detail on that?
(Professor McWilliams) The impact of the euro obviously
affects the price comparison in various different ways. It does
not affect the basic price of fuel, the underlying cost of oil,
which is effectively priced in dollars and just translates at
whatever the exchange rate happens to be. What it does do is affect
the levels of excise duty and the VAT on that excise duty and
the elements of the domestic costs which tend to be fixed in domestic
currency rather than being fixed in international currency. So
the changes in the euro have affected those elements in the position.
It depends which period you look at but the pound over the last
year is roughly ten per cent up against the euro and that will
have meant that the UK disadvantage in those elements of cost
will very roughly have deteriorated by ten per cent.
171. Worse by ten per cent as a result of the
euro.
(Professor McWilliams) Yes.
Mr Laxton
172. Since July 1998 there has been no restriction
in the EU on cabotage operations and in fact looking at some of
the statistics they are quite interesting. In February this year
the European Commission found that 68 per cent of cabotage operations
were carried out in Germany and in fact only 2.9 per cent here
in the UK. In your memorandum to us you say that the threat to
domestic hauliers from continental based operators using cheap
fuel is real, but looking at those sorts of figures is it more
a threat than an actual problem? Would you agree that actually
in terms of the UK hauliers we do quite well out of cabotage operations?
(Mr King) We need to understand what we are talking
about in that UK hauliers who are hauling into Europe are happy
to compete with European hauliers hauling into the UK and looking
for return loads who are able to quote a rate which is significantly
below what a UK haulier can do. Even if the UK haulier has his
tanks full of French diesel he still has his operating costs and
vehicle excise duty which tend to be considerably higher in the
UK than in France or elsewhere in Europe. The impact of the continental
haulier does not need a great number, although there is strong
evidence to suggest now that whereas it used to be 60 per cent
of UK-owned trucks crossing the Channel and coming into the country,
that figure is now 60 per cent continental trucks coming into
the UK. So the ratio has changed. The problem is that they are
able to ask for lower rates and that has a sobering effect upon
the UK haulier who has to match those rates. There are plenty
of examples we know of where continental hauliers have got return
loads at very low rates indeed in order to get their vehicle back
out of the country and that has undermined the UK hauliers' ability
to offer a competitive alternative. There are other factors involved:
the use of East European drivers being paid £70 per week
at the most; low cost fuel; and of course low vehicle excise duty
and the fact that once a continental truck is in the UK it makes
no contribution to the road system, social and environmental costs
are absolutely zero, you do not charge them anything. Those factors
hang over the industry in determining haulage rates. Cabotage
of course is when that truck has got into the UK and is then able
to haul between two British destinations. It is allowed to do
that but it is not allowed to do it on a regular basis. Our belief
is that many continental hauliers are doing cabotage on a regular
basis which is against EU rules. However, unfortunately, as far
as we can ascertain, there is very little enforcement in the UK.
No continental hauliers are ever pulled up to ask what they have
been hauling, where, how often and how frequently; normal practice
I believe in France but not in the UK. We have an enforcement
problem here which needs perhaps examining.
173. That is interesting because usually the
argument which is put about with regard to Europe is that we in
the UK are very down the line on enforcement and France is anything
but. You say that in your judgement there is a complete role reversal
in this particular area of activity.
(Mr King) Yes, to that extent we know of.
Mr Morgan
174. Whose responsibility is that?
(Mr King) I imagine the DETR, the Transport Department
and the local licensing commissioners perhaps conducting checks
on the road. It is not without its complications we admit. We
need to establish, and it is very difficult other than hearing
it from other hauliers who say some very strange things are going
on. Regular contracts are being negotiated with European hauliers
within the UK which should not be taking place. They should not
be regular contracts: once off, occasional, that is what the rules
permit.
175. Have you made any representations to the
DETR on this?
(Mr King) It is an area we are collecting evidence
on. We have not yet done so but we shall do under the auspices
of the Road Haulage Forum, which meets regularly with Ministers.
Mr Laxton
176. Are you not over-egging the pudding a little?
You said earlier and in your memorandum to us that thousands of
jobs will be lost but you have not provided us perhaps with adequate
evidence I would suggest on that. Here you are saying that this
is going to be a real problem and yet the EU figures of February
this year talk about it being positive in terms of the UK hauliers'
position and we are actually doing better in terms of cabotage
across Europe than the reverse. The figure is 2.9 per cent in
the UK. Do you dispute these figures?
(Mr King) I suspect, as we pointed out earlier, that
these figures are changing very rapidly. They can only look back
over a period of time and we would perhaps suggest that when those
figures are updated they may show a very different picture. We
must await the outcome. Based on the evidence we have in terms
of the freight coming into the UK and leaving it, 60 per cent
of the traffic is hauled by continental hauliers. Not so long
ago it was 60 per cent UK hauliers. We would expect to see some
changes occurring.
(Mrs Leeming) May I also say that when we were looking
at the impact of cabotage we were looking at the impact of cabotage
on the UK market? We did not concentrate on what the proportion
of UK international hauliers were doing in other markets. These
figures for jobs were looking at what was happening in the UK.
177. I find it surprising that you only looked
at the impact in the UK because the impact within Europe also
could very well sustain many hauliers in business and improve
their business activity. I am surprised you did not look at that
aspect of it as well.
(Mr King) Just to illustrate one particular issue
which does not appear in any statistics yet we know it occurs
is that a tractor unit will bring a trailer into the UK on a Monday
morning and will haul that trailer to its destination and come
back to the port and then the trailer will go back unaccompanied
on the ferry back into Europe and the tractor unit will pick up
another trailer and go about its business and come back and the
same thing will occur for the remainder of that week using its
fuel and lower operating costs to deliver these goods and then
on Friday or Saturday it will go back with the trailer into Europe
for refuelling. That is one trend which is not picked up by statistics.
(Professor McWilliams) The issue of cabotage as very
technically defined is a little bit of a red herring because it
is not a big issue either on the continent or in the UK as a major
thing. You would expect it to be slightly more on the continent
because of the existence of land borders, easier to get across
and so on. The key issue really is return journeys which are much
more important in terms of the actual total amount of business
which is in effect taken away. It looks from the surveys as though
return journeys account for about 20 times as much activity as
the cabotage itself; it may be even more than that because there
is not enough detail from the official surveys to be able to judge
that. The return journeys are very important because what has
happened is that there has been a huge increase in the proportion
of the two-way traffic taken by the continental lorries. The proportion
at one point was 60:40 in the UK's favour; in the early 1990s
it was more or less even-Stephen and the numbers have gone up
by about two and a half times since then. The latest figures show
62 per cent foreign 38 per cent UK and that change with the associated
return journeys is really the big element which has made a massive
impact in terms of the overall balance of business. These are
potentially profitable international journeys and the ones where
it is the foreign hauliers who have gained the lion's share. These
are things which we set out to predict when we were using our
models and in effect we have verified our models as being on the
cautious side in terms of the numbers which have actually taken
place.
178. Have you done any research with regard
to cabotage into what proportion is opportunistic and which is
pre-arranged and probably very highly organised? Have you ever
done any research into that?
(Professor McWilliams) We have not done any research
into that. I do not think that the official surveys actually go
into that. I looked at the questionnaire and there was no question
in the questionnaire which would make it very easy to determine
that.
179. Is the real problem that what is probably
happening is that continental hauliers coming into the UK are
extremely competitive and they are actually restricting UK hauliers
from putting their prices up. Do you think that a problem? Would
it be a fair comment to say that is probably the main problem?
(Mr King) Yes, it probably is. It is a very, very
competitive market. A continental haulier has economies of scale;
some of them are very big operators indeed.
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