Select Committee on Trade and Industry Fifth Report


Overall impact on British trade and industry

19. British business buys over half the motor fuel that is sold in the UK. Transport costs are roughly five to ten per cent of overall business operating costs, although they vary from sector to sector.[51] In oral evidence, the Minister of Energy said that this figure included the cost of keeping the vehicles on the road, the cost of labour, the associated cost of physically moving goods and "if you just identify fuel for these purposes you find it comes much lower".[52] Figures should also take into account the spend on fuel for company cars. Mr Stringer of the Confederation of British Industry (CBI) told us that the amount of duty alone paid by companies for fuel used in cars was around £3.3 billion a year.[53] In service industries these costs are evidently significant. The Government's Memorandum to us said that the impact of motor fuel taxation on competitiveness will depend in part on the importance of road transport costs to the entire economy. Government calculations show that industry spend on transport fuels in 1998 amounted to £15.7 billion.[54] This represents broadly 1% of the value of output. Looking solely at road fuels, the Government estimates that the spend on road fuels directly amounts to 1.3% of the value of output in the productive industries.[55] Direct spend on road fuels by industrial sectors and road haulage operators amounts to just over £4bn a year in manufacturing and just over £20bn by industry as a whole.[56] In oral evidence, the Minister for Energy cited some figures for other sectors: in response to our request, detailed figures were subsequently provided. These show that for some industries transport, and so fuel, was a significant cost.

Spend on road fuels as a proportion of the value of output in selected industrial sectors:[57]

Some industry sectors
% of total costs accounted for by fuel costs
Dairy products
Coal extraction
Cement, line and plaster
Plastics and synthetic resins
Shipbuilding and repair
Iron and steel
Motor Vehicles

20. The impact of fuel prices on competitiveness is directly related to the proportion of a business's costs attributable to fuel and the relative extent to which it can pass on or reduce those costs compared to its competitors. The Federation of Small Businesses (FSB) stated in October 2000 that "there is no doubt that the high cost of fuel is the most pressing issue facing small businesses at the current time".[58] They went on to say that small businesses find it difficult to absorb or pass on costs when fuel prices rise, unlike large companies, making them uncompetitive against larger competitors and foreign companies.[59] The FSB cited the example of a small mail order company which has faced surcharges levied by mail carriers to cover the increased cost of fuel: one company levied nearly 6% in two months. The company is unable to pass these costs on to customers because the prices have been set in advance.[60]

21. The CBI told us that they had expressed concern about the level of fuel duties and vehicle taxation in the UK for two or three years.[61] They estimated that the duty paid by business in its purchase of fuel had gone up by about £2 billion in the last three years.[62] The Petrol Retailers Association (PRA) were of the opinion that "industry across the UK has been disadvantaged when competing in Europe whenever road transport fuels have featured as a major part of the cost".[63] The Association of International Courier and Express Services (AICES) told us that whatever the cost of fuel, their members will have to purchase "with the knowledge that these costs will eventually be passed on to customers". Unless costs are managed effectively "AICES members will either find themselves unable to compete or with customers who can no longer afford their services".[64] In their Pre-Budget submission to the Treasury on fuel taxation levels, the British Chambers of Commerce cited a number of examples of the impact of high fuel duties on business competitiveness, including:

    —  an import/export business in West Sussex reported that its road freight charges had increased by a third; as a result it expected to lose a major contract to a French rival;

    —  a port in the South of England said that its fuel costs had risen by a third and that its storage space was being used up because of hauliers' bankruptcies;

    —  a Doncaster engineering company's fuel costs had risen by around £30,000 per year over the last two or three years, but it had not been able to instigate price rises itself and hence has seen its margins squeezed. Fuel now accounted for over 25% of all its costs, excluding labour.[65]

22. The Government's Memorandum to us asserts that the cost of spend on road fuel is such a small proportion of total costs that "the impact in practice on trade of a change in a part of road fuel costs in likely to be very small".[66] As to the impact on overall relative cost competitiveness, "changes in motoring taxes are likely to be swamped by wider changes that influence relative costs such as shifts in productivity and earnings, and by developments in product and factor markets affecting the sectors themselves".[67]

23. Companies that are heavily reliant on road transport, particularly small companies, will inevitably be hit hardest by high fuel taxation levels. In some sectors, and in rural areas, rises in fuel taxation can be the straw which breaks the camel's back. However, we have received no conclusive evidence to show that the current level of motor fuel taxation has rendered UK business as a whole less competitive.

51  Q84 Back

52  Q425 Back

53  Q107 Back

54  Ev, p118, para 5 (Including aviation fuel, inclusive of tax) Back

55  Ev, p118, para 6 Back

56  Ev, p161 Back

57  For the full table, see Ev, pp 163-5 Back

58  Ev, p152 Back

59  Ev, p153 Back

60  ibid Back

61  Q103 Back

62  Q84 Back

63  Ev, p57, para 9 Back

64  Ev, p41 Back

65  Not printed Back

66  Ev, p118, para 11 Back

67  Ev, p118, para 14 Back

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Prepared 15 March 2001