House of Commons - Trade and Industry

Select Committee on Trade and Industry Fifth Report

III. IMPACT OF UK FUEL TAXATION

The UK haulage industry

24. Around 81% of all domestic freight is carried by road. In 1998, this equated to a total of 1,630 million tonnes moved by road transport. Operators' Licences ('O-licences') are issued by the Traffic Commissioners to individuals and companies who wish to operate goods vehicles which weigh over 3.5 tonnes.[68] There are around 112,000 holders of such licences, some for own-account transport and others for the provision of hire-or-reward services. There around 422,000 goods vehicles of over 3.5 tonnes gross weight in operation, about 83,000 of these are over 33 tonnes.[69] These vehicles are operated by about 108,000 firms: about half are one-truck companies.[70]

COMPETITIVENESS WITH EUROPE

25. The original 'fuel crisis' arose following the actions of some UK hauliers who claimed that the Government's taxation policies were making it almost impossible for them to compete against their European counterparts. The Freight Transport Association said that "in the short term, the high level of tax rates levied on the UK transport industry is currently undermining its competitive position compared with European operators and putting upward pressure on costs for UK business as a whole". They believe that, as a result of competitive pressures in the international market, manufacturers' export prices have fallen by 2.2% in the last two years, while non-labour input costs have risen by 15.1%. They went on to say that, allied with a "general increase in business taxation of £5bn per year since 1997, this poses a major challenge to UK competitiveness in general".[71] In oral evidence they told us that "there is no doubt that the cost base of other European hauliers is measurably smaller than that of UK hauliers".[72] They put the gap in total haulage operating costs between the UK and other European operators at 5-10%.[73]

26. The Post Office, one of the nation's largest commercial vehicle operators, stated that "there is little doubt the transport industry operating from bases in the UK is disadvantaged compared with hauliers based on the continent". As fuel taxation is higher in the UK, the net result is that European based operators are able to fill their tanks in mainland Europe at a lower rate than their UK counterparts.[74] They went on to say that all the Post Office's transport links between the UK and various European countries are currently operated by European hauliers "who are able to offer lower rates than either UK companies or even what could be achieved by our in-house transport fleet".[75] The RHA stated that "the effect of the fuel duty strategy and the high levels of VED is to undermine the international competitiveness of the haulage sector".[76] In a joint submission, the National Farmers' Union (NFU) and the FTA said that in the short term "the high level of tax rates levied on the UK transport industry is currently undermining its competitive position compared with European operators and putting upward pressure on costs for UK business as a whole".[77]

27. The Institute for Public Policy Research (IPPR), on the other hand, believed that "the haulage industry is facing some competitive pressure due to high fuel prices, but it has exaggerated its claims".[78] Likewise, the Energy Savings Trust stated that they believe the international competitiveness problems of the UK road haulage sector have been "exaggerated".[79] In their opinion, there is a great deal more that many hauliers can do to reduce fuel costs through energy efficiency and thereby improve their competitiveness. The Rail Freight Group thought that the problems with the road freight industry will not be solved by reducing fuel duty, and the differences with continental Europe have been overstated.[80] In its Report on the haulage industry, the Environment, Transport and Regional Affairs Committee did not accept the principal argument advanced by witnesses from the road haulage industry that fuel prices and VED were too high and should fall. It concluded that "in the past haulage rates have been unrealistically low and have not reflected the true costs imposed by the road haulage industry on our society".[81]

28. The RHA told us that, on average, just over 30% of hauliers' total costs were accounted for by fuel costs.[82] They went on to say: "the customer simply cannot pass on or cannot absorb any price increases; it is just not possible if they are to remain viable themselves".[83] Mr Roger King of the RHA quoted the example of a Government Agency which had in its contract with a haulage business a clause allowing increases in fuel prices to be passed on. The haulage company obtained an increase in its rates because of fuel increases but when it went back again for a 6% increase, "the customer was not prepared to entertain that, even though the contract in theory allowed it and indeed in the end they settled for 3%".[84]

29. The costs of fuel would presumably be passed on by hauliers to customers when they are able to do so. Competition for UK business from overseas hauliers may lead to UK hauliers often bearing the costs themselves in order to remain competitive. Competition comes in several ways:

— overseas hauliers competing with UK hauliers for loads carried into and out of the UK;

— non-UK hauliers temporarily establishing themselves for business in the UK, for several days, returning to Europe in due course.

The extent of such business is a matter of some controversy.

CABOTAGE

30. The operation of national road haulage services by non-resident individuals or companies within a member state of the European Union is known as cabotage. In July 1998, a European Council Regulation lifted the restrictions on cabotage, thus allowing any road haulage carrier for hire or reward "to operate on a temporary basis national road haulage services... in another Member State".[85] This meant that vehicles registered and based outside the UK could compete directly with UK hauliers for domestic business. In the view of the RHA, the removal of all cabotage restrictions meant that the difference in fuel duty rates "became a serious threat to all UK goods vehicle operators".[86] They went on to say that if action were not taken "thousands of jobs will be lost in the UK haulage industry as contracts are awarded to foreign registered operators".[87]

31. Department of the Environment, Transport and the Regions (DETR) statistics put the level of cabotage in the UK at 0.06% of tonne-kilometres moved. Following a pilot survey in December 1999, a survey was carried out, with the agreement of the RHA, by the British Market Research Bureau (BMBR) from 13 January to 9 February 2000 at the Ashford Services Truckstop. Interviews were carried out with 1,019 drivers of foreign registered lorries leaving the UK.[88] 3% of drivers reported that they had carried out cabotage-a consignment loaded and unloaded in the UK by a foreign operator; most of these had picked up one such consignment. The DETR note that whilst the survey has "produced a reliable estimate of the magnitude of cabotage in the UK" the "detailed results must be treated with some caution".[89] The Financial Secretary told us that the methodology for the study had been agreed with industry and the 0.06% figure was "robust".[90]

32. A European Commission Report published in February 2000 found that there had been no "explosion" of cabotage when quantitative restrictions were abolished in July 1998.[91] The figures for the UK showed 2.9% cabotage in the UK and 3% carried out by UK operators elsewhere.[92] Over 68% of all cabotage operations were carried out in Germany, much of it by Dutch hauliers.[93] However, Mr Hookham of the FTA told us that the threat of cabotage was very real and that "although very little business has actually transferred, British haulage rates have had to be pegged down to be able to match the threat of much lower rates being offered by foreign hauliers".[94] The Royal Academy of Engineering stated that, since the Regulation had come into force, benchmark haulage rates had been depressed and UK rates had fallen by nearly 20% relative to road freight costs.[95] Mr King of the RHA also told us that "our belief is that many continental hauliers are doing cabotage on a regular basis which is against EU rules".[96]

33. In a letter dated 12 October 2000 to John Bridge of the RHA The Transport Minister, Lord Macdonald, remarked:

The Institute for European Environmental Policy note that, when driving on the continent, UK hauliers have as much opportunity to benefit from cheaper fuel as their competitors, while retaining the tax advantages of the UK.[98] We recommend that immediate action is taken to ascertain whether continental hauliers are indeed breaking EU rules on cabotage. If this is found to be the case, UK enforcement must be stepped up and appropriate action taken. There is, however, no evidence that non-UK hauliers are responsible for more than a small volume of freight carriage within the UK, nor that the recent fall in haulage rates within the UK is directly attributable to the threat of lower rates offered by non-UK hauliers.

RETURN JOURNEYS

34. Professor McWilliams of the RHA told us that the issue of cabotage as 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".[99] The key issue was return journeys. He told us there had been a "huge increase" in the proportion of two-way traffic undertaken by continental lorries.[100] Return journeys account for about 20 times as much activity as cabotage. He quoted figures of 562,000 UK vehicles going abroad and 884,000 continental vehicles coming into the UK.[101] He explained:

102

Mr King of the RHA told us that:

103

The DETR survey found that 68% of foreign registered vehicles picked up goods to take back out of the UK. By comparison, DETR's International Road Haulage Survey indicates that around 90% of UK registered vehicles carrying loads on international journeys from the UK are full or partially loaded.[104] Hauliers coming into the UK can carry up to 1,500 litres per transport unit, including no more than 500 litres per trailer, without attracting excise duty.[105] Mrs Leeming of the RHA estimated that a lorry carrying this amount of fuel could travel over 1,000 miles.[106]

35. UK hauliers returning to the UK from trips overseas can and do take advantage of the cheaper fuel on offer. The FTA also told us that hauliers cross the channel at weekends to take advantage of the cheaper fuel to fill their tanks. Mr Geoff Dossetter of the FTA told us "you do see quite a number of UK tractors in operation going through the tunnel, down to Belgium, filling up with the low rates there and coming back".[107] Eurotunnel operate a Saturday service to allow truck operators to take advantage of the lower price of fuel in France. Filling a 1,000 litre tank would result in a saving of around £160, after the deduction of the price of the ticket.[108] The possibility open to UK hauliers of purchasing fuel on the continent does not meet the difficulties of those obliged to fill up in the UK if, for example, they have undertaken journeys within the UK since their last overseas journey. The figures available to us suggest that UK-based hauliers are losing their competitive edge against other European hauliers in respect of international journeys as a result of high fuel taxation. The introduction of a 'vignette' for non-UK hauliers may help redress the balance. We recommend that the Government seek to maintain a full picture of international vehicle traffic to establish the trend.

OVERSEAS DRIVERS

36. In July 2000 the Transport Sub-Committee of the Environment, Transport and Regional Affairs Select Committee raised concerns about European hauliers using cheaper drivers from other countries such as eastern Europe. They recommended that the Government should examine the issue closely and work with the police and the Vehicle Inspectorate, in particular to make sure the drivers are adequately trained and have sufficient understanding of road haulage and traffic regulations.[109] The Government response stated that within the UK, "legislation is being sought to allow the introduction of different types of training for different types of drivers". The Government is also considering European Commission proposals published in November last year aimed at combatting such illegal activity: "the practice of some haulage firms within the EU to employ non-EU drivers on the black market and under illegal conditions does pose a threat to competitiveness in the single market".[110]

37. Mr King of the RHA had the impression that the haulier Willi Betz, an Austrian company with a distribution centre in the South East of England, uses east European drivers to cut costs down.[111] In oral evidence, the Financial Secretary said "my understanding is that we are aware that some companies are employing drivers from outside the EU, thereby avoiding paying the appropriate taxes and being able to undercut legitimate companies so I think there is some evidence that that is happening."[112] No companies have yet been prosecuted. Employment by hauliers of unqualified drivers from eastern Europe is one which affects competitiveness, although wholly unconnected to motor fuel taxation levels. In the interests of equity, the Vehicle Inspectorate should actively seek out and prosecute any cases where hauliers can be shown to have broken the law.

IRELAND

38. In the Republic of Ireland, excise duty levels barely changed over the 10 years from 1990 to 2000. In October 2000 the price for unleaded petrol was 29.45p per litre as opposed to 48.82p in the UK; for diesel the price was 25.62p compared to 48.82p.[113] The Post Office told us that they take every opportunity to source fuel from outside the UK. Their vehicles based in Northern Ireland are instructed to draw fuel in Eire, despite the fact that this often means vehicles doing considerable extra mileage. Furthermore, for the trunk services they operate into Ireland, the Post Office request that all drivers fill their tanks before starting the return journey. Transport managers rotate their fleet to ensure that as many vehicles as possible have the opportunity to draw fuel in Ireland in any given week.[114] Evidence suggests that this is a typical practice. The RHA told us that 50% of fuel purchases by Northern Ireland-based hauliers are now made south of the border.[115] The PRA figures confirm a drop in deliveries of petrol and diesel in Northern Ireland of 52.79% from 1994 to 1999.[116]

39. The price differentials between Northern Ireland and the Republic of Ireland have also led to fuel being smuggled across the border. BP told us that: "large amounts of pirate fuel are frequently transported over the border from Southern Ireland and can be sold at some dealerships at lower prices than regular product". The problem has been exacerbated as the duty differential has increased in recent years.[117] Mr Polkey of Esso told us that their business in Northern Ireland is "finding it very difficult at the moment".[118] From April to September 2000 729,530 litres of smuggled fuel were seized by the Revenue and the RUC in Northern Ireland.[119] We are aware that Treasury officials have received representations on the subject and that it has been the subject of debate in the Northern Ireland Assembly.[120] We note that Customs and Excise have increased their resources devoted to tackling oils fraud in Northern Ireland by a factor of four.[121] The Financial Secretary told us that the increased enforcement activity has led to "greatly increased seizures".[122] The situation on the island of Ireland is different in scale and ease of access to that between Britain and the continent of Europe. Widely differing tax rates have caused, and are causing, serious disruption.

OVERCAPACITY

40. The issue of alleged overcapacity in the UK haulage industry arose during the course of our inquiry. The Institute for European Environmental Policy commented that "it is difficult to distinguish effects arising from foreign competition from those which result simply from the chronic overcapacity and acute price competition which seem to bedevil the UK haulage industry".[123] The Rail Freight Group stated that "until the supply of hauliers willing to work at near zero margins reduces and demand more nearly matches supply, no amount of tinkering with fuel duty will sort the problem out".[124] In a letter to John Bridge of the RHA, Lord Macdonald, the Minister for Transport, said that the competition in haulage was intense and that statistics showed overcapacity of around 20%.[125] However, the Financial Secretary told us "I do not think we have made an estimate of the extent of overcapacity" and that "we do not have a figure that we regard as an authoritative one".[126] He went on to say that there may well be overcapacity but that it was important to recognise the full range of the factors affecting the haulage industry.[127] The Environment, Transport, and Regional Affairs Committee found that one reason why haulage rates were low was because entry to the industry was too easy.[128]

41. Mr King of the RHA told us in oral evidence "it is difficult to understand the word 'overcapacity' in an industry so wide and diverse as the haulage industry". He went on to give the example of just-in-time deliveries where there may be vehicles parked up in the last week of a month but in the first week of the month there may be an undercapacity to move goods; overcapacity could be 20% but there is no easy way to establish such a figure.[129] In additional supplementary evidence the RHA stated that even if the 20% figure could be substantiated "then such a percentage is not really excessive". They do not, however, believe the industry's travails are simply due to overcapacity.[130] In oral evidence, Mr Hookham of the FTA told us that he could not see that there was any more overcapacity than in any other market.[131]

INSOLVENCY AND BANKRUPTCY

42. One obvious symptom of an industry in difficulties is an increase in insolvencies. DTI figures for bankruptcy and liquidations of transport firms were lower in 1999 than in 1996. In 1996, there were 1,008 individual bankruptcy orders and 197 compulsory liquidations, compared to 979 and 152 respectively in 1999.[132] In oral evidence, Mr King of the RHA told us that it was difficult to put a figure on the numbers of bankruptcies or jobs lost due to high fuel taxation levels. He went on to say "there has not necessarily been a hugely discernible trend in terms of hauliers going out of business because of receivership. What we have seen is a considerable number just selling up and moving out of the business".[133] Commenting on the DTI figures, he thought they did not really indicate whether or not the structure of the business was changing.[134] Professor McWilliams of the RHA said he expected to see the bankruptcy figures rise in the next 18 months as a consequence of the recent rise in fuel prices.[135] Supplementary evidence submitted by the RHA put the number of insolvencies in the Transport and Communications sector at 1,646 in 1999, up from 1,588 in 1998.[136] Quoting ICC figures, they stated that "more haulage companies have failed in the last two years than the rest of the 1990s put together": 1,850 haulage companies have gone bankrupt since January 1998 compared with 1,700 from 1990 to the end of 1997.[137] Mr Hookham of the FTA told us there was largely anecdotal evidence of individual companies that have ceased trading "but in terms of delivering robust statistics, I sincerely hope we do not get to that stage".[138] The T&G told us that there was no evidence that there had been a substantial reduction in the numbers employed in the transport industry.[139] In spite of extensive anecdotal reporting of haulage companies going under, there is a dearth of official statistical evidence to prove conclusively that this has occurred, or if it has occurred, that it is due to high levels of motor fuel taxation. Government has a responsibility to clear up this confusion.