Select Committee on Northern Ireland Affairs Minutes of Evidence

Memoraundum submitted by the Confederation of British Industry Northern Ireland

  1.  The CBI is an independent, non-party political organisation funded by its members in industry and commerce. Its mission is to help create and sustain the conditions in which businesses in the UK can compete and prosper. CBI members come from all sectors of UK business and include more than 250,000 public and private companies, as well as more than 200 trade associations.

  2.  The CBI welcomes the establishment of this Inquiry by the NIAC. The proposed aggregates tax is another ill-judged environmental tax which will undermine existing indigenous industry in Northern Ireland, particularly in rural areas. We share the Quarry Products Association's and British Aggregate Association's concerns about the impact of this tax and the market distortions which will be introduced. We welcome the comments from Paul Boateng, Financial Secretary to HM Treasury, that there are serious issues raised in Northern Ireland as a result of this tax (breakfast meeting—24 October 2001). In this brief memorandum we highlight a number of key issues which are of particular concern to the CBI.

  3.  We are concerned that the impact of the aggregates tax on Northern Ireland has not been evaluated by Treasury—or consultants to the Treasury despite the fact that Northern Ireland has an extended land-border with another EU member state and that there is a significant movement of quarry products between the two jurisdictions. This indeed makes Northern Ireland industry unique within the UK—with a potential and growing export market in the Republic of Ireland (ROI), especially for higher added-value products, but also from competition from the ROI for raw quarry materials as well as added-value products. It continues to be a concern that Treasury officials show little understanding of the impact of a land-border with another EU member state. The impact of environmental taxation on other industries, notably fuel retailing, and the lessons arising from this do not appear to have been learnt.


  4.  Business is concerned to achieve and maintain environmental quality within the general framework of sustainable development. The CBI has argued that environmental taxes should be based on sound principles for their development. These principles should build on the following points:

    —  the prime objective is to influence polluter behaviour, and not to raise additional revenues;

    —  sound science and transparent and rigorous appraisal must be the basis for developing effective instruments, ensuring that the optimal outcome is achieved;

    —  instruments should take full account of their potential impact on UK competitiveness.

  5.  We have a very real concern that the aggregates tax fails to meet these requirements. Most fundamentally, there is likely to be no material change in behaviour to a more favourable environmental outcome. There have been serious questions raised over the research basis of the tax which failed to take account of the economic or environmental benefits of aggregate production, including land restoration and enhanced biodiversity. Most significantly for this inquiry, there is little evidence to suggest that the effects on competition have been adequately understood or addressed.

  6.  In terms of quarrying the CBI Working Group on Environmental taxes concluded in 1998 that:

    —  the externalities arising from quarrying are local and thus are best dealt with at local level through the existing planning and regulatory system. A uniform national tax would fail to reflect differences in locality or levels of externality, in essence it would not discriminate between good and bad environmental performance; and

    —  the quarrying sector is already extensively regulated. Increases in regulation are currently underway. A tax would have negligible environmental impact while raising industry costs and damaging competitiveness.

  Both these conclusions have significant resonance in Northern Ireland.


  7.  It is clear that the proposed aggregates tax applied in Northern Ireland fails to meet a number of the key points identified in paragraphs 4 and 6:

    —  a transparent and rigorous appraisal has not been undertaken for the impact of the tax in Northern Ireland; and

    —  the impact on the sector's competitiveness vis a vis the Republic of Ireland has not been fully considered—indeed it would appear that up until recently it had not been considered at all!

  8.  The CBI has several major concerns:

    —  the aggregates tax is being introduced to influence behaviour, primarily to tackle the environmental costs of quarrying and to encourage the use of recycled materials. The CBI is not aware of any evidence to suggest that these objectives will be achieved in Northern Ireland, and furthermore, we believe there is likely to be a negative overall environmental outcome as a result of an increase in cross-border traffic movements;

    —  a tax established on a weight basis (rather than on an ad valorem basis) is particular damaging to the Northern Ireland industry as a result of the lower value of aggregates in the Province (Government figures indicate that in NI the average value (ex-works) of aggregates is £2.60/tonne in 1999—comparable figures in GB are c£6.50/tonne). Thus a £1.60/tonne tax has a more significant impact on competitiveness in Northern Ireland than elsewhere in GB. In effect the tax will increase prices by 61 per cent. The potential effects of this within the market cannot be underestimated;

    —  the production of aggregate across NI affects each area and will represent a significant cost to each. Total production of aggregates has been around 22 million tonnes each year (1998 figures) and hence the cost to the NI business will be around £35 million annually, plus the costs of compliance which itself has not been adequately addressed. Recent production of aggregate minerals (approximate) and the main mineral type (although there are others) is set out below, indicating the scale of the tax issue for each area:

Downsandstone 5 million tonnes
Antrimcrushed rock4.5 million tonnes
Armaghsandstone2.2 million tones
Fermanaghlimestone2.5 million tonnes
Londonderrysand and gravel and crushed rock 3 million tonnes
Tyronelimestone and sand and gravel 5 million tonnes

    —  although imports of raw aggregate materials are to be taxed and exports exempted, there is proposed to be no similar provision for value added products, a key issue of concern in NI;

    —  the tax will be particularly damaging to the higher added-value sectors in this industry ie companies involved in concrete product manufacture, "Black top" operations and brick, pipe and tile manufacture—these companies will be at competitive disadvantage in their Northern Ireland home market relative to ROI suppliers and at the same time they will be disadvantaged in securing market share in the ROI market. Aggregate forms a large part of the product and hence the manufacturing process. Margins will be reduced, profits will be reduced, there will be fewer resources for investment, in many cases contracts will be lost, hence employment in the sector will reduce. Existing operations will be disadvantaged, and in some cases this will lead to closure to re-location south of the border. With other advantages which the ROI currently offers, notably a favourable exchange rate, lower corporation tax rates, cheaper electricity and lower transport costs, re-location may well be significant in border counties. The market distortion that this tax will introduce is certain to lead to additional transport movement, particularly in border areas;

    —  the tax will increase costs to the construction sector if aggregate producers are successful, at least in part, in passing on the costs to their customers. This will in reality affect the total volume of construction, since investment budgets, particularly public sector investment, are generally fixed. Aggregates companies will not be able to absorb the tax without increasing prices, but it is not clear ultimately how the market will react in an area where there are tax free supplies of value added products available; and

    —  legitimate producers of aggregates, particularly those exemplars who are taking a leading position with regard to environmental issues, are likely to experience unfair competition from operators who avoid paying the aggregates tax—it is unlikely that Customs and Excise will have the commitment or the resources to monitor operators who seek to avoid paying the aggregates tax. Northern Ireland already faces an expanding "black economy"—the impact of smuggling on the fuel industry is significant and has severely undermined existing legitimate operators. Can Customs and Excise assure the Committee that illegitimate activities, including smuggling, of aggregates can be adequately addressed?

  9.  The CBI believes that there is good economic and environmental reasons for seeking EU approval for a derogation, at least for a number of years, on the existing proposals. Northern Ireland is regarded as a region in transition and continues to receive special EU support for the peace process and the necessary regeneration and restructuring needed. This industry is largely located in rural areas with businesses in the border areas, which are largely disadvantaged areas, being placed at the highest level of risk from these tax proposals. In these areas unemployment is generally higher and job opportunities less. The manufacture of value added products from aggregate production in particular provides valuable employment in these areas. The effects of the Tax would be to hit this sector and, importantly, all capital investment in new or upgraded infrastructure, including roads, rail, housing, schools, hospitals and wider regeneration initiatives, which all use aggregates as a main constituent of construction. We believe that with sufficient commitment that a strong case can be developed to put to the EU to support a different approach in Northern Ireland.

30 October 2001

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