House of Commons - Northern Ireland Affairs

Select Committee on Northern Ireland Affairs First Report

INTRODUCTION OF THE AGGREGATES LEVY IN NORTHERN IRELAND

4. THE ECONOMIC IMPLICATIONS OF THE PROPOSED LEVY

Quarrying and quarrying-related industry in Northern Ireland

37. As we have already noted, quarrying and associated industry in Northern Ireland is a major employer, responsible for ten per cent of UK aggregates production per year. In addition to the six thousand people directly employed by organisations belonging to the QPANI, others are employed in related industries such as: haulage; fuel supply; engineering and construction.[64] The members of the QPANI not only quarry aggregates, but manufacture value-added products such as asphalt and concrete pipes, flags and kerbstones.[65]

38. Compared to the equivalent industry in the Republic, the QPANI believe that the industry in Northern Ireland is "probably more highly developed", although "in the last ten years ... they have begun to catch up".[66] Confidence in the industry is high: Mr Murphy told us that "as long as we do not have any measures which put a spanner in the works we would be confident that our industry should continue long into the future to be a major employer in Northern Ireland".[67] One of the main factors helping the industry in the Republic to 'catch up' is a favourable exchange rate, but this did not seem to concern the Northern Ireland industry greatly.[68]

39. The aggregates levy was another matter. "In terms of the thinking of business people," we were told, "it is more significant than currency fluctuation. In currency fluctuations you can have good days and bad days and nobody is going to move a major operation south of the border on the back of [them ...] but they will on the back of this".[69]

40. The argument presented by both the QPANI and the British Aggregates Association was that the increase in price of Northern Ireland aggregates and value-added products arising from the levy would be a permanent, not temporary, distortion of the market. As such, it would provide a strong incentive to producers in both states to modify their practices in order to sustain or increase their business.

41. The evidence we received is that producers will change only their patterns of working, or their operational base, and not the materials they use. If this is the case, the fundamental principle of the levy - to encourage more sustainable use of resources - will not be met.

42. The Minister told us that he believed the argument presented by the aggregates industry in Northern Ireland was primarily about competitiveness. While he accepted the industry's concerns were understandable he nonetheless believed that changes in demand were a basic measure of the levy's effectiveness; he argued that compensation for Northern Ireland for the diminution of the aggregates industry would be found in gains for other industries.[70]

43. We agree with the Minister that the terms in which the industry presented its concerns to us concentrated on competitiveness. However, in Northern Ireland's unique position, demand will be diverted rather than transformed: Northern Ireland's loss will be the Republic's gain. Therefore the argument about competitiveness is also an argument about increased environmental cost and the stability of communities and local economies. The Minister accepted that the early problems in developing the levy arose from the attempt to deal with the narrowly environmental arguments in isolation:[71] here, too, the environmental and economic concerns of Northern Ireland are indivisible. In the following paragraphs we set out the reasons why.

Transformation or displacement - the effect of the levy on demand

44. In both Northern Ireland and the Republic of Ireland aggregates are readily available. The strength and size of the industry means that prices are already very low.[72] We were told that the market price of concrete blocks is £12 or £13 per tonne; the price for asphalt or tarmac is £25-£30 per tonne; while "a very standard" extracted aggregate "sells in Northern Ireland at the quarry gate for under £3 a tonne".[73] The CBI wrote that the average price for Northern Ireland aggregates overall was only 40 per cent of the average price in Great Britain.[74]

45. This ease of access to cheap aggregates in the marketplace is precisely what the levy is designed to address. It intends to make aggregates less desirable by raising the price to a level that deters use and encourages consumers to switch to other construction materials which become in comparison less costly.

46. The fact of the land border between Northern Ireland and the Republic, however, means that the other materials to which consumers there will switch will simply be materials made from the same aggregates, quarried on the other side of the border: the absence of a comparable levy in the Republic seems set to ensure a displacement, rather than a deterrent, effect.

The effect on the value-added sector

47. As noted in paragraph 3 above, virgin aggregates which are imported into the UK will be subject to the levy but imported value-added products will not, because the deemed point of "commercial exploitation" through manufacture occurred elsewhere.[75]

48. The quarrying industry are deeply concerned about the effect of this distinction on competition in the value-added sector which, following earlier government campaigns to boost production, now accounts for over 50 per cent of the aggregates trade in Northern Ireland.[76] While producers of virgin aggregate will continue to meet fair competition in the Northern Ireland marketplace from their counterparts in the Republic - whose imports will be taxed in the same way - it will not be possible for value-added aggregates producers to continue to compete evenly. This is because producers of value-added aggregates in the Republic will not only sell their products tax-free in the Republic, but will also export them levy-free to Northern Ireland.

49. Witnesses feared that the lower prices producers from the Republic will be able to offer will damage the Northern Ireland industry in two ways:

(ii) They will enable producers from the Republic to undercut Northern Ireland producers in the domestic marketplace. We will consider this concern in more detail in the paragraphs below.

The economic haulage distance

50. The ability of producers from the Republic to undercut the market in Northern Ireland will depend in large part upon their ability to transport aggregates — which are bulky and heavy — cheaply by road. We were told that the level at which the levy is set was predicated upon an economic haulage distance for aggregates within the UK of 16 miles.[80] Again, it would seem that the particular circumstances of Northern Ireland, where producers and consumers have access to cheaper fuel in the Republic, were not taken into account.

51. We heard conflicting views about the extent of the geographical area in which the market would be distorted by the availability of cheap products from the Republic. Robinson Quarry Masters suggested that "some government offices" believed that the impacts of the price differential would only be felt within 10 miles of the border; they however believed that the differential would impact directly on quarries within 20 miles of the border.[81] The QPANI suggested the affected zone could be 20 to 25 miles, which accounts for "approximately half of Northern Ireland".[82] Loughside Quarries suggested the effects would be felt for up to 30 miles.[83]

52. Robinson Quarry Masters also pointed out that there may be a subsidiary effect upon the most northern businesses as producers in the south of Northern Ireland, who would previously have traded in the market in the Republic of Ireland, "will be forced to focus on markets north".[84] This was similarly referred to by the CBI, who described it as "a domino effect".[85] What seems clear is that in Northern Ireland the combined effect of the levy and of higher fuel prices means the distance over which it would be worth transporting products from the Republic would be much higher than has been estimated between individual regions of the UK.

53. We were provided with maps by the QPANI, which we have reprinted with our minutes of evidence.[86] These illustrate clearly the extent to which producers from the Republic could undercut local Northern Ireland industry as a consequence of the levy. They point out that half of Northern Ireland falls within 20 miles of the land border; thus, even at a conservative estimate of the economic haulage rate prevalent in Northern Ireland, a significant number of businesses and communities are likely to be affected by the intensification of competition.

Evidence for the displacement effect

54. Our witnesses pointed to the plight of the Northern Ireland petrol retailing industry, which has lost about 50 per cent of its business since 1994,[87] as evidence that where a price differential is introduced customers with a choice will generally opt to pay the lower amount. Mr Murphy told us:

55. The quarry managers told us that, faced with a similar scenario, they would have to consider either absorbing the cost of the levy - to maintain competitiveness in the market - or relocating in order to avoid the levy altogether. Businesses would find it difficult to absorb the cost of the levy because profit margins, like gate prices, were very low: profits on asphalt - about £2 per tonne - would be cut by 80 per cent by absorption of the levy,[89] while the £1 profit per tonne on concrete blocks would become a 60p per tonne deficit and would probably lead to the abandonment of that industrial sector in Northern Ireland.[90]

A differential rate

56. The CBI Northern Ireland told us that they had suggested substituting a differential, value-based rate for the universal rate of £1.60/tonne which will be charged on aggregates under the Finance Act 2001.[91] This would enable the rate to be charged in a way which reflected the variations in value of aggregates in different marketplaces. Mr Nigel Smyth calculated that if £1.60/tonne were a suitable rate within Great Britain, the rate within Northern Ireland (where prices are much lower) "would come out at 60p".[92]

57. The Financial Secretary and Mr Andrew Field, head of the environmental tax branch in H M Treasury, assured us that this suggestion was under consideration although "there are very real, practical problems to be overcome in having differential rates". [93] Mr Field continued:

"It is very difficult to identify in a precise way what we mean by these low value products and what could be identified within the scope because, for example, one quarry's primary product may be a secondary product of another quarry, one person's waste is another person's primary product".

Nonetheless, Mr Field confirmed that the question was under active consideration in the context of the Pre-Budget Report.[94]

The impact on individual firms

58. The costs of compliance with the levy — estimated by the British Aggregates Association at more than £55,000 per firm in the first year — would provide another burden which would weigh particularly heavily on small firms.[95]

59. One anecdote provided a pertinent example of the potential impacts:

60. We received other direct testimony from our witnesses that producers of value added products considered they had no option but to move their manufacturing operations into the Republic in order to avoid the tax and thus sustain their businesses.[97] Mr Clarke, Managing Director of ReadyUse Ltd, appearing for the CBI Northern Ireland assured us:

We believe that many producers will consider it necessary to move to the Republic in order to protect their businesses if the levy is introduced.

The effects on employment

61. The crisis in the value added products sector is particularly significant for the effects it may have on employment: we were told that the manufacturing processes employ between five and ten times as many people as quarrying itself.[99] If firms were to relocate, it was suggested, it would in many cases be uneconomic for existing workers to commute to the new plant, and, as suggested by Mr Clarke in the evidence cited above, jobs would therefore also be lost to the Republic.[100]

62. We sought clarity about the extent of the job losses which might arise from the tax. The final figures provided to us by the QPANI calculated that approximately 3,600 jobs were at risk by virtue of being located within an economic haulage distance from the Republic (discussed previously in paragraphs 50-53); 3,600 jobs represents 65 per cent of the industry.[101] Mr Doran of the Construction Employers' Federation Northern Ireland estimated that 1,000 to 2,000 of those jobs could be at risk in the short- to medium term.[102] While the Financial Secretary believed that a figure of 1,000 jobs was "about right", the Northern Ireland Executive stressed that "this would still represent a severe blow to the NI economy". [103] It was also suggested that there could be knock-on effects to supporting industries such as engineering firms and fuel suppliers.[104]

63. The Government did not fully comprehend the importance of the industry to individual communities in Northern Ireland, which are frequently rural and provide few employment opportunities. Councillor Fergus McQuillan of Fermanagh District Council testified to the reality of the unemployment problem, while the Construction Employers' Federation Northern Ireland pointed to the fact that two thirds of the jobs in quarrying and ancillary industries in Northern Ireland are in areas designated as TSN (Targeting Social Need).[105] Councillor McQuillan wrote that in Erne East and Erne West:

Much of the product from these quarrying operations is exported to the Republic of Ireland bringing in much needed revenue to the Northern Ireland economy. It is reasonable to assume that half of those employed by the firms based in Erne West reside in Erne East, an unemployment blackspot ...

The industrial base in Erne East has contracted to such an extent that now only one factory exists in a 150 mile area.

We cannot afford to lose these jobs".[106]

64. Friends of the Earth Northern Ireland argued that the introduction of the aggregates levy provided a perfect opportunity to foster new forms of employment "in areas such as organic farming, producer retailing, timber production, tourism and recycling of aggregates" which would provide a more sustainable future for communities.[107] However, they accepted that for many communities the present alternative to aggregates production is "the threat of unemployment and poverty": they did not make clear how the transition from the current state to their desired state would be achieved.[108] The majority of our witnesses were not optimistic, at least for the short term and the effect of job losses on rural communities. One possibility for further employment which we raised was in the haulage industry, but again it was suggested that the cheaper fuel and excise rates available in the Republic meant that firms there were more likely to feel the benefit.[109]

Illegal trading and enforcement

65. Following the experience of the petrol retailing industry, fears were also expressed to us that competition in Northern Ireland would come not only from legitimate businesses in the Republic but from those dishonestly evading the levy. Robinson Quarry Masters expressed concerns about a "massive black market",[110] while Loughside Quarries believed that:

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66. Others expanded on the difficulty of enforcement. Mr Acheson of the British Aggregates Association reminded us that "in a five to ten-mile length of the border itself there might be a dozen border crossings".[112] The Quarry Products Association Northern Ireland and the British Aggregates Association were sufficiently concerned about the possibility of illegal aggregates being transported across the border that they organised a visit to Northern Ireland by members of the HM Customs and Excise policy team in August 2001.

67. The details of that visit are set out in the QPANI's original submission to us.[113] In oral evidence the Chairman of the QPANI, Mr Jack Duffy, told us that "Customs and Excise have admitted to us verbally that it is going to be very, very difficult to police and they only have limited resources".[114] Mr Clarke of the CBI Northern Ireland similarly believed that Customs were struggling, "perhaps picking up only four per cent or five per cent" of current illegal imports. The industry believed it to be inevitable that, in these circumstances, Customs' attention would be focussed on the recovery of petrol revenues which could amount to up to £12,000 per tanker impounded.[115] While the lost revenue on a lorry full of aggregate would be only about £35 a load,[116] Mr Murphy of the QPANI pointed out that the cumulative effect on the industry of illegal imports slipping through was potentially catastrophic:

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68. We asked the Minister how the tax would be policed. He told us:

"Customs will be responsible for enforcement in Northern Ireland the same way as they are for other indirect taxes, that is their responsibility ... What one would say is that opportunities to smuggle aggregates will be limited because of the nature of the product, bulky, low value and high transport costs ... the running of sand is never going to be a major money spinner".[118]

As Mr Murphy suggested, it does not need to be. Again, this points to the Government's lack of understanding of the reality of the situation in Northern Ireland. We contrast the Minister's words with those of Mr Clarke:

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We are not re-assured.

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73 QQ12; 25; 56 Back