Select Committee on Trade and Industry Minutes of Evidence

Memorandum by Representatives of the Plastics, Rubber, Coatings and Associated Machinery and Toolmaking Sectors

Our nine manufacturing industry trade associations represent the plastics, rubber, coatings and associated machinery and toolmaking sectors. Together we represent 315,000 employees, 6,150 companies and £22.2bn sales turnover per annum.

We welcome the Inquiry being undertaken by your Committee which we feel is much needed in the present very difficult business conditions. Since our members supply an enormous range of semi-finished and finished goods to a diversity of markets we believe that their experience provides serious pointers to the real condition of the UK manufacturing industry.

The terms of your Inquiry quite rightly recognise that there was widespread concern about the future of manufacturing in the UK before the September 11 tragedy.

On 26 April our Associations wrote to the then Trade Secretary Stephen Byers MP outlining a growing pattern of closures and job losses and the reasons for them. This letter is attached as Annex A and you will see that we outlined key concerns and recommended action to deal with them.

Our letter states, "We need assurances that overall government policy really is informed by an accurate appreciation of the consequences for manufacturing competitiveness of the strength of sterling and the increased burden of regulation and taxation such as the damaging Climate Change Levy".

The Plastics and Rubber Industries trade magazine, PRW, published on 21 September a survey of 400 companies. The survey was undertaken before September 11 and we give its key findings below:

    —Seven out of 10 UK plastics companies said they were facing the worst market conditions ever, with 68 per cent reporting a fall in first half 2001 turnover compared with last year.
    —24 per cent of firms recorded a drop in turnover in excess of 20 per cent.
    —In a period of falling unemployment, 36 per cent of firms reduced the size of their workforce in the last 12 months and 32 per cent expect to do so in the next six months.

    —34 per cent of firms have delayed or cancelled investment in the last year. The same number expect to do likewise within the next six months.
    Margins have dropped by an average of 11.3 per cent in the last year.
    Plant utilisation in the sector stands at 63 per cent.
    —60 per cent of firms consider it "very important" or "important" that the government extend the capital allowance to all areas of investment.
    —56 per cent of firms blame cheaper overseas competition for the slump. With 39 per cent attributing it to the strength of sterling, 27 per cent on lack of government support for the industry and 15 per cent said increased bureaucracy was cutting into the bottom line.
In the year ending June last year around 11,000 jobs had been lost in the plastics and rubber sectors (EEF statistics).

Our Associations were invited to meet with the Minister for Science and Innovation Lord Sainsbury on 28 September. The Managing Directors who came with us gave stark evidence of difficult business conditions. They particularly attacked the new tax on the use of energy, the Climate Change Levy (CCL). Only a handful of companies in our industries are benefiting from a rebate through Negotiated Agreement. The Agreements use IPPC criteria as their basis, which relate to pollution potential not energy.

Where no rebate is obtainable the levy is not revenue neutral for any firm in our industries. Only one fifth of the Levy is offset by the reduction in employer National Insurance Contributions.

The relative impact of the Levy on manufacturing versus services requires serious attention. We are advised that comparable environmental taxes overseas are not as costly to firms. Our international competitiveness is being negatively affected.

Lord Sainsbury asked for direct evidence of the hardship being caused by CCL. I attach at Annex B the evidence provided to him by BPF and PIFA.

Our Associations have concluded that this unfair tax has greatly hit our processor members' competitiveness and should be withdrawn and replaced with voluntary agreements to achieve energy reduction.

Manufacturing represents the heart of a healthy industrialised economy. It is important not just because of the jobs, output, investments and exports that it accounts for directly, but also because of the other sectors of the economy that are dependent on it. This means that in the UK the importance of manufacturing goes far beyond the direct contribution of 18 per cent GDP, down from 21.6 per cent in 1995.

Today, the manufacturing and service sectors are critically interdependent. A significant proportion of service-related jobs and associated wealth creation are dependent on manufacturing.

Without investment the economy will falter, and is faltering. We recognise it is industry's responsibility to invest in new technology but it should be given every encouragement to do so.

Permanent 40 per cent capital allowances for investment in plant and machinery for small and medium size enterprises is a helpful step in the right direction, and 100 per cent capital allowances for IT reflect belief by the government that these measures do encourage investment. There is also a strong case for widening the definition of IT to include the sophisticated computers which often control modern machinery. We believe that government should extend capital allowances to at least cover this aspect.

There is an urgent need to accelerate manufacturing investment, related to both the purchasing of plant and machinery and to leasing capacity, through 100 per cent capital allowances, introduced permanently so that industry can plan its future investment strategies.

We were disappointed the Chancellor did not announce 100 per cent capital allowances in his pre-Budget statement. We shall lobby him to include it in his Budget.

You will be aware that the UK's record level of fuel duty greatly harms the competitiveness of our industries. 70 per cent of the price of petrol and diesel is duty or VAT, making Britain the most expensive country in the EU for fuel.

We wish the Chancellor in his Budget to reduce fuel duty to the average level in Europe to ensure competitiveness in this aspect.

The crucial role of our industries in the supply chain is such that the DTI has with us embarked on a number of welcome competitiveness initiatives such as:

    —The Plastics and Rubber Industry Forum (PRIF)

    —The Rapid Product Development Initiative for the tool making sector
    —The Process Industry Centre for Manufacturing Excellence (PICME)
    —Faraday Plastics.
    —Last week we welcomed the announcement of the Chemicals Innovation and Growth Team.
These initiatives enjoy our support and participation.

Some of our associations have fed views into the Review of the DTI, many aspects of which will affect the competitiveness of our industries.

We welcome the evaluation and cull of the impenetrable maze of DTI grant schemes but hope that the overall total of business support funds is not to be cut and that the new arrangements channel funds to where they are really needed.

Putting leading business people on the DTI Strategy Board and Boards of the Directorates-General is also welcome but it is essential that some of them are manufacturers.

We do not believe the DTI has been effective in challenging Treasury measures, which badly damage manufacturing competitiveness such as the Climate Change Levy. We firmly believe the Treasury should appoint somebody with a manufacturing industry background to the Monetary Policy Committee.

We welcome the DTI's announcement of the small business anti-regulation drive but wish it was closer to our own proposals. The EU survey published last November showed the UK has the least business-friendly regulatory environment in the EU. All our members would agree with that. We proposed to the former Trade Secretary in April that a Panel chaired by a Cabinet Minister, composed of businessmen from small and large firms, be set up to replace the failed Haskins Task Force. It would have the power to examine new legislation and current regulation on business and an annual target for disposing of excessive or unnecessary regulation.

Britain has slipped to 16th place of out 23 industrialised nations for spending on research and development. We welcome the Chancellor's decision to extend R and D Tax Credits.

The Polymer Industry in Northern Ireland had suffered from the highest electricity prices in Europe, which, after adding the net cost of Climate Change Levy are on average 70 per cent higher than like for like plants in Great Britain, as confirmed by companies who have plants in both regions. A similar cost penalty applies compared with the Republic of Ireland. The high prices are as a direct result of pricing structures agreed with the Electricity generators when they were privatised by the Treasury, during the late 1990s. This has had the effect of locking in increasingly uncompetitive electricity prices which cannot be changed even with the introduction of competition from outside Northern Ireland.

It should be emphasised that the best firms in our industries can match anyone in the world for productivity. We welcome Trade Secretary Patricia Hewitt's ringing endorsement of UK Manufacturing in her speech last week. But, as we write, the liquidations, closures and job losses continue and we have a real fear that the companies and jobs that go will never come back. But, as we have outlined, Government Policy can make a big difference.

British Plastics Federation, British Rubber Manufacturers' Association, Packaging & Industrial Films Association, Flexible Packaging Association, Gauge & Toolmakers Association, Polymer Machinery Manufacturers & Distributors Association, Northern Ireland Polymers Association, British Coatings Federation, Scottish Plastics & Rubber Association.

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