Select Committee on Trade and Industry Minutes of Evidence

Memorandum submitted by the Transport and General Workers' Union

1.  INTRODUCTION

  The Transport and General Workers' Union represents over 869,000 workers in all the main sectors of the economy. With this wide area of representation we can speak with authority for a range of different interest groups affected by fuel taxation. We have specific sectors which deal with commercial road haulage, fishermen, agricultural workers, as well as other sectors which have members who are also drivers. Our paper starts by looking at some of the elements, which have impacted on the price of motor fuel and some of the knock on effects of these changes. Part 2 of our submission looks at some of the changes that have occurred within oil and freight industries and how these have impacted on the employees in these industries. However, the "fuel crisis" was not just about fuel taxation it was a complex interaction between underlying issues, which affected employees, employers and consumers. Part 3 draws together the main points of our submission.

PART 1

  In this part of our submission we will look at some of the elements which have impacted on the price of motor fuel prices and taxes and some of the "knock-on" effects of these changes.

2.  PRICES

  The real cost[2] of motor fuel to consumers, is higher than it has ever been: in July of this year it was 10 per cent higher than its previous peak reached in August 1981. It was 60 per cent higher than in March 1991 and 29 per cent higher than in May 1997, when the Labour Government was elected. However, the real price of crude oil is still some 70 per cent lower than its peak in 1979.

Table 1

PETROL PER LITRE JUNE 2000-AUGUST 2000

Type of petrol	June 2000	July 2000	August 2000
Lead replacement	87.9	88.7	86.1
Ultra low sulphur diesel	82.6	83.1	80.9
Unleaded (ordinary)	84.0	84.7	80.8

  Source: First Release—Consumer Price Indices, August 2000, p 7.

2.1  High Crude Oil Prices

  With crude oil prices at such high levels the oil companies are reporting record profits from their upstream oil and gas production divisions. Two years ago, the government was thwarted in its efforts to get more money from the North Sea Oil fields because of the collapse in crude oil prices. With the increase in the price of oil the Government could consider bringing in higher taxation on oil exploration and production. The oil companies benefited in 1993 from a reduction in petroleum revenue tax from 75 per cent to 50 per cent for existing fields and abolished for new ones.

  Table 1 gives a selected average price of petrol between June 2000 and August 2000.

2.2  Stablilising Fuel Costs

  To overcome this price volatility the Government could stabilise the cost of fuel by setting a guaranteed retail price. If the price of oil increased then the excise duty would be reduced. Conversely, if the price of oil decreased then duty would increase to maintain the price at the guaranteed price. The price guarantee could be the price used in the last budget to estimate the revenue from oil duty.

  This would benefit industry by stabilising costs, but it would also benefit the low paid who own cars, and who are reliant on them to travel to work. The low paid, especially in rural areas, may have no other alternative form of transport available to them. Also the cost of living of the lowest income groups is most adversely affected by tax increases, with the effect becoming smaller as further you go up the income distribution.

  We would also like to point out that in constant prices (1995=100) between 1980 and 1999-2000 motoring costs have fallen from 107.0 to 103.9, while rail fares have increased from 76.2 to 103.2, and local bus fares from 78.9 to 109.2—see Annex 1. The bus industry receives a fuel duty rebate, without that rebate the increase would have been considerably higher. Also only 45 per cent of families' own cars, a figure that has remained constant since 1969. It is the growth in two and three car owning families, which has been responsible for the increase in car ownership. Now, over one quarter of all households have access to more than one car. The majority of families still rely on some form of public transport as their main mode of travel.

3.  TAXES

  Fuel taxes in the UK have risen to become the highest in Europe, 20 per cent higher than in France. This increase is due in part to the fuel duty escalator, which was introduced in 1993 and was justified on environmental grounds, but the principal attraction may have been its ability to raise revenue painlessly. From 1993 till 1999, road fuel duty was automatically increased by a fixed percentage above inflation. The escalator was set at 3 per cent in March 1993 and was increased the following November to 5 per cent. In 1997 the Government raised it to 6 per cent. In the November 1999 Pre-Budget report the escalator was abolished, with any future increases being decided on a Budget-by-Budget basis.

3.1  FUEL DUTIES

  In 1999-2000, fuel duties—excluding VAT— raised £22.3 billion, 6 per cent of total revenue and almost a quarter of the sum raised by income tax. Tax accounts for 75 per cent of the price of unleaded petrol.

Table 2

EXCISE DUTY 2000-01 (APRIL 2000 PRICES)

Type of fuel	Duty (pence)	Total duty as percentage of price (per cent)	*Total tax as a percentage of price (per cent)
Petrol (litre)	51	70.3	85.2
Unleaded petrol (litre)	49	74.8	89.7
Diesel	49	73.6	88.5

  *Includes VAT.

3.2  Collection of Fuel Duty

  It has been claimed that the fuel supply system collapsed so quickly, was partly due to the way the Government collects duty on petrol. Excise duty is payable at the refinery gate so many retailers have reduced the amount of petrol and diesel they store as a cost saving measure. The Government could consider changing the point where excise duty is collected from the refinery gate to the point of sale. This would encourage retailers to maintain higher inventories.

4.  PRICING CONCERNS

  In the section we will look at some of our concerns about the pricing of diesel as well as some of the affects this has on the industries involved in the fuel crisis.

4.1  Price of Diesel

  We are also concerned about the price of diesel, days before the fuel crisis, hauliers in the North-East were turning their backs on bunkered fuel suppliers because local forecourts were offering cheaper diesel. The question is how can it be possible to buy cheaper fuel at the forecourt rather than buying in bulk? Therefore we would like to see the Competition Authority mount an investigation into the pricing and supply of diesel. The Authority could also examine the supply of diesel, because different forecourt suppliers buy the same fuel from the same refinery, and the same petrol could be branded under different names.

4.2  Competition

  It is claimed that competition between the petrol retailers and supermarkets has become so intense in recent years, that some companies such as Shell report they make almost no profit from the sale of petrol in the UK. They rely instead on convenience stores to support their service station network. BP says it hopes to make 1p in profit from every litre of petrol sold, compared with the 62.5p a litre it collects for the government.

4.3  Harmonised European Fuel Tax

  Fuel taxes in the UK have soared to become the highest in Europe, 20 per cent higher than in France. The UK duty is over twice that of Greece. There is a case for arguing to bring in an EU wide fuel duty to level the playing field on duty. Especially as a single market in road haulage has been created in the EU—see 4.8—any solution we believe will require a pan-European application.

Table 3

EUROPEAN ROAD FUEL DUTY PLUS VAT, PENCE PER LITRE, JUNE 1999

Country	Leaded Petrol	Unleaded Petrol
UK	62.13	55.47
France	49.94	46.24
Netherlands	—	44.84
Finland	—	44.41
Italy	45.13	42.29
Denmark	—	41.25
Sweden	—	40.82
Germany	—	40.12
Belgium	44.50	39.92
Portugal	40.20	37.96
Austria	—	32.35
Ireland	36.11	29.80
Spain	30.54	28.04
Luxembourg	31.73	27.11
Greece	28.18	24.39

  Source: HM Customs and Excise Annual Report (1998-99).

4.4  A Combination Effect

  It is the combination of high and rising taxes with the tripling of the price of crude oil since late 1998 which has done the damage. During this year there has been substantial variation in the price of oil. Table 4 gives an example of the volatility of the market. Since May 1997 there has been a 42 per cent nominal increase in the price of unleaded petrol, three-fifths of it explained by tax.

Table 4

Latest price	Change on week	Year ago	2000 High	2000 Low
$34.16*	+1.11	$21.93	$34.26	$222.58

  Source: Financial Times 17 September 2000, p21 * October.

4.5  Help for Hauliers

  In a specific move to help hauliers we would agree to the introduction of a "blue" diesel scheme. Where they pay a lower rate of duty similar to bus operators, who receive a fuel duty rebate. We would also like to see such a scheme applied to taxis as well.

4.6  The Farmers

  Farmers are not penalised by high taxes on fuel. They pay 3p a litre on "red diesel", a sixteenth of the rate paid by everybody else. Their problems would appear to be more to do with a drop in income than the price of diesel, which particularly affects small farmers.

4.7  The Fishing Fleet

  We believe that the case for the fishing fleet is much stronger than the case for the farmers. Although fish prices are down 20 per cent this year the industry is uniquely exposed because it cannot pass on the rising costs as most fish is sold by auction.

  It is claimed that the supply of fuel for the industry is very competitive, and it now accounts for over 40 per cent of gross income, although the fishermen do not pay tax or duty on diesel fuel. However, there would appear to be a discrepancy between the rise in crude oil and the rise in marine diesel, with marine diesel rising faster than crude oil. The competition authorities should investigate the discrepancy between the prices of crude oil and marine diesel. It is this cost, together with a scarcity of fish and shellfish, that has resulted in a serious economic crisis, within the fishing industry. They are also suffering from anti-competition behaviour, three EU countries are helping their fishermen, and another three were on the point of doing so.

  The fishermen's protest was in part about high fuel costs and they are looking for some sort of fuel concession. We understand that the Government accepts that there is distortion of competition, and that fishing is particularly vulnerable to fuel price rises.

4.8  Cabotage

  Since July 1998 the transport of goods in a country by a vehicle not registered in that country has been in full operation within the European Union (EU). This is known as cabotage and is part of a long-term plan to harmonise transport throughout the EU. According to the UK employers it has "created nothing but grief for UK operators because their operating costs are higher than in most other EU countries". (Phillips 2000:2)

  There is a double-edge effect with cabotage. Foreign operators can come into the UK and move goods cheaper than resident hauliers. According to the Road Haulage Association a European based truck can quite legally, bring 1,260 litres of diesel into the UK. This amount of diesel will run a lorry for 2,300 miles at an average 6 mpg. Therefore, that European operator has a commercial advantage over his UK based competitor of just under 25 pence per mile. At the same time UK hauliers find it difficult to compete in continental Europe. They pay tolls in France as well as Vehicle Excise Duty in the UK. However, it must not be forgotten that it is possible for UK hauliers returning from continental Europe to fill up with cheaper diesel in France and Belgium. Schemes operate where British hauliers can use the Comos card to buy cheaper French/Belgium fuel and get up to 30 days' free credit before being billed back in Britain. In March the price for a litre of diesel, including VAT, cost 50.80p in France, 47.79p in Germany and 44.43p in Belgium compared to the British price of 78.90p.

  The strong pound also goes against the interest of the road hauliers as it affects both costs—especially oil— and the rate of exchange. From Table 5 it can be seen that between 1998 and 2000 the UK fell from being ranked 3 in 1998 to 13 in 2000.

Table 5

EUROPEAN DIESEL PRICES AT MID APRIL EXCLUDING TAX AND DUTY PENCE PER LITRE1

Country	1998	1999	2000
Austria	16.02	13.54	19.37
Belgium	14.17	14.48	19.31
Denmark	13.60	13.66	19.46
Finland	15.52	14.71	22.17
France	11.01	11.39	16.90
Germany	12.94	13.27	13.78
Greece	10.93	11.91	16.96
Ireland	16.79	14.48	20.26
Italy	13.55	14.29	19.16
Luxembourg	12.72	13.58	18.13
Netherlands	14.45	15.21	19.04
Portugal	13.27	12.03	17.42
Spain	13.23	14.11	18.87
Sweden	14.25	18.32	19.39
United Kingdom	11.87	12.11	20.18
UK Rank in EU	3	4	13

  Source: Digest of UK Energy Statistics 2000, p 236.

  1  Prices concerted to pounds sterling using mid April exchange rates

4.9  Comparative Costs

  Table 6 gives the comparative costs of operating an EU five axle, 2+3, 40 tonne lorry with an annual mileage 60,000 consuming 7.1 mpg. These costs are indicative, rather than definitive.

Table 6

	UK (Dom)1	UK (Dom)2	France Cabotage3	France Cabotage4	Flagged Out5	Flagged Out6
Wages/NI	14,976	14,976	14,976	19,918	14,976	19,918
Road Tolls			5,611	5,611	5,611	5,611
Vehicle Insurance	5,680	5,680	5,680	5,680	5,680	5,680
Establishment	14,065	14,065	14,065	14,065	14,065	14,065
Licences	5,750	5,750	5,750	5,750	486	486
Depreciation	10,608	10,608	10,608	10,608	10,608	10,608
Fuel/Oil	24,127	25,836	14,352	14,352	14,352	14,352
Tyres	3,576	3,576	3,576	3,576	3,576	3,576
Maintenance	6,780	6,780	6,780	6,780	6,780	6,780
TOTAL	85,562	87,271	81,398	86,340	76,134	81,076
Difference		2.0	-4.9	0.9	-11.0	-5.2

  Source: Phillips 2000: 3.

  UK (Dom)1 gives the Motor Transport cost for UK hauliers on domestic work using Freight Transport Association (FTA) bunkered fuel prices (62.8 a litre), and are used as the benchmark for this paper.

  According to data presented to the Road Haulage Forum (RHF), in April this year, the costs of French trucks operating in the UK were roughly 5 per cent lower (and Dutch trucks, 10 per cent lower) than those of British ones. The real question is how much of the internal haulage market is provided by foreign trucks. According to a survey by the RHF it is 0.06 per cent.

Table 7

PERCENTAGE DIFFERENCE IN COSTS

	UK (Dom)1	UK (Dom)2	France Cabotage3	France Cabotage4	Flagged Out5	Flagged Out6
Wages/NI				33.0		33.0
Licences					-91.5	-91.5
Depreciation
Fuel/Oil		7.1	-40.5	-40.5	-40.5	-40.5
TOTAL		2.0	-4.9	0.9	-11.0	-5.2

  We also pointed out in our Working for your rights in Transport document p 45 that "Interestingly, the Freight Transport Association (FTA) estimates that the current cost of a French haulier running a French domestic operation and a UK haulier running a UK domestic operation are broadly similar at 58p/km compared to 55p/km. However French hauliers pay 5.01p/km infrastructure costs."

PART 2

  In this part of our submission we will look at some of the changes that have occurred within oil and freight industries and how these have impacted on the employees in these industries. However the "fuel crisis" was not just about fuel taxation it was a complex interaction between underlying issues, which effected enployees, employers and consumers.

5.  THE OIL INDUSTRY

  The modern reality of the oil industry is that it is risk adverse, to a degree that many outsiders would find surprising. Once a serious health and safety issue is raised, line managers have little or no discretion to anything other than pull tankers off the road.

5.1  Changing Condition of Employment

  In recent years cost cutting has caused the companies to pare back the number of drivers and outsource many of the logistic functions. As well as this paring back of drivers there has been a worsening of the terms and conditions of employment. Underlying some of the reluctance of drivers to not cross so-called picket lines was their own experience of worsening employment conditions over the past 10 years. Some of our drivers have had their employment contacts transferred to four different employers in the last six years.

5.2  Driving should be an In House Function

  We believe that in the long-term the oil companies should as a matter of policy return the oil delivery function to an in house function. In the short to medium term we believe that Modern Minimum Standards in the oil delivery industry should be introduced, applicable to all the oil companies and their contractors.

  Shift patterns within the industry should be more "family friendly" and working hours should be based on a maximum working week of 48 hours, with at least two free weekends in four. Tanker driver routes are in the main short haul, so the arguments used in other sectors of transport industry for longer hours do not apply.

5.3  Intimidation

  We were very concerned about the intimidation experienced by our members during the so-called fuel duty crisis. We recognise that the issue of intimidation is not strictly part of the terms of the reference for the Committee but we have attached a copy of our report as Annex 2 to this submission for the Committee's information.

6.  JUST-IN-TIME DELIVERY SYSTEMS

  Since the middle of the twentieth century, the growth in freight transport has followed the upward trend of real Gross Domestic Product. However, the demand for freight is closely related to the economy's performance at any given time.

6.1  Changing Demands

  However, it is not just economic growth, but it also changes in the way business is conducted, and the changing expectation of consumers, which have impacted on the freight industry. Increasingly consumers pull production through the supply chain, rather than the manufacturing process regulating the demand for transport. This is called the Efficient Consumer Response (ECR) which has recently been developed in response to the changing demands of the consumers. Today, when an item is sold, its replacement is ordered. According to Lex Transfleet (2000:24) "The increasing efficiency of the freight industry has allowed this significant change to occur and thus ensure stock levels are kept to a minimum." ECR means of just-in-time delivery involve developing high standards of product quality and innovative services in freight to meet the increasing expectations of British business and consumers.

  The industry now offers a wider range of goods and services, and the economic changes in Britain have been accompanied by real growth in speed and reliability of distribution, characterised by the notion of just-in-time delivery systems. The arrival of just-in-time expectations has placed new demands on the efficiency of freight in Britain. Shops and businesses used to offer very basic products and services on behalf of the manufacturer. It has now evolved that some shops are open 24 hours a day, seven days a week, which has changed and increased the pattern of demand.

  This has been a quiet revolution, which has taken place over the last five to 10 years. New technology and more information have allowed corporations to hold less inventory, and move what they have faster through the system. Even the humble warehouse has become a high-technology "hub", "distribution centre" or "strategic stocking location".

  Many suppliers delay finalising their order until the last moment. This minimises inventory and maximises the ability to respond to the customer's order.

6.2  Shocks to the Supply Chain

  Companies are under intense pressure from the supply chain, and because they respond quickly other firms in the supply chain do not feel the need to build up their inventory. This creates a major threat to these new, lean, supply chains, the unexpected. As Brown (2000) has eloquently described the situation "But if the lorries do not roll, the economy starts to grind to a halt very quickly". The logistical efficiency of the UK's supply chain makes it vulnerable to disruption. The UK economy is now so complex that any disruption in one area has immediate knock-on effects elsewhere. Failures in one supply chain are quickly causing failures in others.

  When there is a predictable hiatus, such as Christmas, the Millennium, or bad weather in winter, there is a degree of forecasting available—the fuel blockade was totally unforeseen. Motorway service stations are required to keep their tanks topped up, but most retail sites operate with just enough stocks to meet demand. Some petrol companies keep the storage tanks full at sites that they own and operate, but individual dealers make their own decisions.

  Motorway service stations are required to keep their tanks topped up, but most retail sites operate with just enough stocks to meet demand. Some petrol companies keep the storage tanks full at sites that they own and operate, but individual dealers make their own decisions. The fuel crisis showed that panic buying could empty service stations within 24 hours. But even if all available fuel storage was used the country might have an additional day or two before supplies were exhausted. In the "fuel crisis" we only avoided a complete shutdown because the protestors suspended their actions before public support began to ebb away.

  The system works provided nothing goes wrong, but there is no slack in the system. Shocks to the supply chain are transmitted backwards and forwards more quickly than in the past. Companies may react faster, but shocks to the system now have wider ramifications. All members of the supply chain and inter-linked supply chains are extremely vulnerable. Many factories carry enough parts to maintain production for only a day or two. Retailers—especially in the food sector—use fleets of trucks to replenish their stores several times a day.

  Overall the system has led to enormous cost savings. Retailers use former warehouse space for retail shelving. Manufacturers have less cash tied up in stocks, releasing funds and factory space for productive investment. According to Hill (2000) "Nobody disputes the benefits of streamlining inventory management. Alan Greenspan, Chairman of the Federal Reserve, has identified it as one ingredient of productivity improvements in the US".

  The problem for companies is that holding more stocks is enormously costly. According to Brown (2000) "Research at Cranfield carried out in advance of last year's millennium bug scare found that holding just 12.5 per cent extra stock would push the manufacturing sector into recession, wiping out growth and causing a contraction of 0.4 per cent. Holding 20 per cent extra stock would cause a contraction of 3.3 per cent. Wholesalers fare even worse, contracting by between 2.7 per cent and 7.4 per cent. Retailers would continue growing, but at a much lower rate.

  But even a 20 per cent increase in stocks would be little help to companies facing a week or more of disruption, with stocks for only a couple of days. For most businesses, doubling or trebling stocks is out of the question. They have got so much benefit that they will never go back to previous stock holding patterns.

  One of the surprising elements of the "fuel crisis" was the realisation that the road haulage industry holds much lower fuel stocks than it used to, even though 90 per cent of Britain's goods deliveries are made by road. "Simon Chapman the Freight Transport Association's economist says many smaller companies no longer hold their own bunker stocks because thin margins have forced them to cut overheads by relying on bunkers owned by the big oil companies and independents such as Securicor Fuelserve. As a result, the industry typically holds only two to five days stock at any one time". (Brown 2000)

  In this lean supply chain culture it is the smaller hauliers who are being squeezed by the new technology. The Internet, combined with other developments in logistics systems, can be used to deliver huge cost savings. Better supply chain management allows a more efficient use of resources, but in the main these benefits are only accessible to the larger operators.

6.3  Impact on Employees

  With the coming of the supply chain culture there are people who have been adversely affected, mainly the employees. Increasingly our members are being asked to work longer hours, as well as more "family unfriendly" shifts while the rhetoric if for "family friendly" policies. There is a dichotomy, between the seven day, 24 hour consumer lead culture, and "family friendly" policies, and this needs to be urgently addressed.

PART 3

  This part of the report pulls together the main themes of our submission to the Trade and Industry Committee.

7.  CONCLUSION

  In our submission we have tried to highlight some of the issues brought about by the current levels of motor fuel taxation on the competitiveness of UK enterprises, and the impact that the supply chain has had on employees in the freight industry.

7.1  Main Points

  The Government could consider bringing in higher taxation on oil exploration and production.

  To overcome the price volatility of fuel the Government could stabilise the cost of fuel by setting a guaranteed price.

  The Government to change the point where excise duty is collected from the refinery gate to the point of sale.

  The competition authorities should investigate the supply and pricing of diesel for the road haulage and fishing industries, as well as the supply and pricing of retail petrol.

  The Government should introduce a "blue" diesel scheme for hauliers and taxis.

  The Government should raise with the European Commission the introduction of a EU wide fuel duty—especially for the road haulage industry.

  With the coming of the supply chain culture employees are being asked to work longer hours and more "family unfriendly" shifts. There should be an investigation into the impact of these "family unfriendly" shifts on family life.

  The TGWU aims to improve the quality of the terms and conditions of employment in the oil delivery industry by:

—  Negotiating the introduction of Modern Minimum Standards into the oil delivery industry in the short to medium term. In the long-term, driving should be returned to an in-house function.

—  Negotiating shift patterns within the oil delivery industry which should be more "family friendly" and the working week should be based on a 48 hour maximum.

Bibliography

  Brown, Kevin (2000) "Manufacturers prop up the dominoes: The fuel crisis has exposed how dependent British industry has become on "just-in-time" systems. Financial Times, 22 September, 16.

  Hill, Andrew (2000) "The quite supply-chain Revolution" Financial Times, 9 Oct p18.

  Lex Transport and the Road Haulage Association (2000) "The Lex Transfleet Report on Freight" Coventry: Lex Transport and the Road Haulage Association.

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2   The price relative to the all-items retail price index. Back

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Prepared 15 March 2001