Northern Ireland as an enterprize zone

Written evidence from CBI Northern Ireland

1 CBI Northern Ireland welcomes the opportunity to provide written evidence to the Committee’s inquiry into ‘Northern Ireland as an Enterprise Zone’. The inquiry’s terms of reference refer to the publication of the UK government’s proposals for re-balancing the Northern Ireland economy but at the time of writing this still has not been published.

2 What is clear from our assessment of some of the academic literature on Enterprise Zones is that there can be a considerable variety of such zones and a wide range of incentives.

3 In the paragraphs below we respond to the questions specifically raised by the Committee in its terms of reference.

How does an enterprise zone operate?

4 There is extensive academic research on this topic. Within the UK the principle tools/incentives available in Enterprise Zones, which were introduced in the early 1980s, appear to be focused around three principle incentives:

- rating reliefs

- enhanced capital allowances

- relaxed planning restrictions

5 The UK experience of Enterprise Zones has been focused at regenerating tightly targeted local areas. We believe there have been around 32 Enterprise Zones within the UK, introduced in three phases with the last zones being introduced in the early 1990s. Northern Ireland had two zones introduced in the 1980s.

Why should Northern Ireland be declared an enterprise zone?

6 The arguments for declaring Northern Ireland as an enterprise zone are well established and related to an economy which over several decades has failed to improve its productivity relative to the rest of the UK and resulting in an increasing net subvention to the region. The Northern Ireland economy is typified by:

o Low levels of productivity – the gap with GB has not closed despite many strategic reviews and economic development strategies, yet Northern Ireland now faces a situation where Selective Financial Assistance is being reduced due under EU state aid rules

o Low earnings levels, particularly in the private sector

o High levels of economic inactivity, and significant pockets of deprivation

o High dependence on benefits

o An economy where the public sector is a dominating feature, with around 32% of employment in the public sector (GB average is 21%)

o Relatively low levels of enterprise and start-ups

o An economy which is severely lagging the recovery in the rest of the UK, due largely to a significant property boom and bust and our exposure to, and spill-over effects from, the difficulties with the Republic of Ireland economy

o And of course we are coming from a situation of a troubled past – and the legacy of that past in many areas still remains

Developing Northern Ireland as an ‘Enterprise Zone’ (EZ) may also provide some additional marketing opportunities which will help promote Northern Ireland but securing investment will require appropriate and meaningful incentives.

What should be included in any enterprise zone proposals?

7 In theory a wide range of fiscal and regulatory matters could be included. In discussing this with our members the key messages arising are:

- keep it simple (and administrative costs low)

- ensure measures are aimed at achieving clear objectives

- in addition to supporting a general reduction in the corporate tax rate, there would be support for targeted measures designed to support the strategic development of the economy, for example by developing clusters in key sectors

- there must be merit at looking at other policies which ease the ‘regulatory burden’ on NI companies – though with devolved powers this does not need to be designated an EZ

Are these proposals aimed at any particular sectors?

8 There are strong arguments for supporting incentives aimed at encouraging the growth and development of particular sectors, to help build competitive advantage and create critical mass, something which Northern Ireland is lacking in many sectors.

9 There are several sectors which CBI believes offer significant growth potential over the next decade, including food and drink, creative industries, ICT sector, tradeable services, health technologies, high value manufacturing and tourism. Targeted incentives aimed at supporting some of these sectors would clearly act as a valuable stimulus for development.

10 For example Northern Ireland suffers a considerable competitive disadvantage when trying to encourage and attract television drama production into Northern Ireland as we do not have a tax incentive supporting this activity. While the UK government underpins the film industry with a globally attractive tax credit for film production, it does not support television drama in a similar fashion.  This is in contrast to the Republic of Ireland (section 418 legislation), France, Canada and many parts of the United States of America.

11 If Northern Ireland is to be declared an Enterprise Zone this could be the framework or justification for extending the film tax credit to television drama only within Northern Ireland. 

12 In addition there are certain taxes which have been introduced over the last two decades which take little account of Northern Ireland’s specific geographic location, nor the fact that we share a land-boundary with the Republic of Ireland. Both the Air Passenger Duty and the Aggregates Levy are particularly damaging to the local economy, though the latter was subsequently amended.

13 The existing Air Passenger Duty tax has a particularly negative impact on Northern Ireland vis a vis the Republic of Ireland where their ‘departure tax’ has been reduced from €10 to €3 (albeit temporarily) – a significant discrepancy on the APT facing travellers from Northern Ireland airports (see Box 1 below). This undermines the competitiveness of Northern Ireland airports and particularly for international flights will undermine the potential development and sustainability of these services in Northern Ireland, yet international connectivity is of major importance as Northern Ireland economic success will increasingly rely on exports and tourism.

14 Forecasts up to 2015-16 indicate APD will double over this period (as the UK increases revenue from £1.9bn to £3.8bn), thereby further disadvantaging travelers departing Northern Ireland airports.

15 Forecasts up to 2015-16 indicate APD will continue to rise from the £1.9bn in 2009-10 to £3.8bn in 2015-16 and, crucially, that UK aviation tax will continue to rise even when aviation joins the EU ETS in 2012.

16 The Aggregates Levy is another tax introduced a decade ago with little thought to the regional consequences on the quarrying and aggregates industry in Northern Ireland. However after intensive lobbying a more appropriate derogation and an Aggregates Levy Credit Scheme were introduced with a commitment from the industry to improve its environmental performance. Unfortunately this scheme has recently (9 Sept 2010) been challenged by a judgement from the EU General Court which has deemed the original European Commission decision to allow the relief scheme was flawed (due to insufficient assessment of state aid issues) – the consequences of this decision are not clear at present but could seriously threaten the quarrying and aggregates industry in Northern Ireland.

17 This levy has a direct impact on competitiveness and without a derogation/credit scheme will distort the aggregate market within the island of Ireland (as it cannot be effectively enforced), putting at risk legitimate operators. If a resolution to the current legal challenge cannot be resolved to the satisfaction of the industry we believe the devolution of this tax to the Northern Ireland Assembly should be seriously considered.

Is there a priority as to what should be included?

18 A more competitive tax regime for companies – we have argued in support of lower corporate tax rate but have also highlighted potential of enhanced allowances, notably capital allowances, R&D incentives, and enhanced allowances for training and marketing – however we need to be aware of and manage effectively the costs/deadweight etc as we will have to pay for these through a reduction in public expenditure.

How long should the enterprise zone operate for and what aspects might be made permanent?

19 Whatever is introduced must last for at least 10 years, and arguably longer. The Secretary of State has stated it will take 25 years to create a more balanced economy. Certainly there is broad agreement in the business community that the necessary structural changes will occur over an elongated period.

20 Depending on the measures introduced there may be scope to make some of these permanent. However there are other specific measures which could be introduced to act as a catalyst for the development of key sectors eg Accelerated Capital Allowances would stimulate private sector capital investment in the tourism sector though in this case a scheme may only be required for a set time period.

Which aspects would be the responsibility of the UK Government and which would be the responsibility of the NI Executive?

21 This will clearly depend on what measures are introduced.

What worked well, and what did not work well, when there were enterprise zones previously in Northern Ireland?

22 We are not aware of the specific details of the evaluation on the two NI Enterprise Zones, in Belfast (started 1981) and Londonderry (started in1983). We understand indirectly that a review was completed in the late 1980s which concluded that the zones produced poor value for money because companies operating out of them were taking business away from other existing companies located elsewhere, with no additional benefit to the economy.

23 More generally evaluations of the EZs introduced across the UK in the 1980s indicate:

o Relatively expensive cost per job – c £17,000/job, EZs varied in nature – the urban zones were the most expensive (with land reclamation costs)

o Reduced rates offset on some/many occasions by higher rental – much of the benefit was accrued by investors and landlords

o About one third of investment and one quarter of jobs created within EZs were ‘short distance transfers’ eg displacement

o Planning restrictions were regarded as less important than financial incentives. Capital allowances were most important for developers. Tax incentives appear to have had biggest impact where places are already doing well (this probably reflects the reality that companies invest in regions not on the basis of one or two factors but a wide range of factors)

o Future schemes need to do more to relate to the local labour pool and integrate better with the provision of skills training

24 A more general concern expressed is that they were criticised for not fundamentally addressing the locational needs of business. Foreign Direct Investment favoured the capital allowances, labour availability and land availability over rate relief. Clearly many also benefited from Selective Financial Assistance within these zones too.

25 Many of the evaluations (according to various academics) give mixed results and delivered varied conclusions – some academics suggest that ‘the growing body of evaluations has provided no conclusive evidence of their effectiveness’!

What lessons can we learn from enterprise zones, or similar initiatives to try and stimulate enterprise, in other countries?

26 It is important that we design a package of incentives which meet the needs of the NI economy. The aims of an EZ should be to encourage high value FDI, the faster growth of indigenous businesses and the strengthening of key sectors, driven by increasing productivity and a strong export focus.

27 Other countries appear to have gone further with their EZs – including such incentives as no payroll tax for certain periods, company tax exemptions, land tax exemptions, no employer tax contributions.

 Other Comments

28 We do not believe we need new tax breaks to encourage property development – creating the demand to use the existing commercial/industrial property is the challenge.

29 An easier planning framework would be helpful. However efforts are underway in NI to improve/streamline the planning system with a significant reform agenda planned – as always the key issue from a business perspective is delivery. The CBI has supported the development of ‘simplified planning zones’ in selected areas eg Titanic Quarter.

30 Assuming the USA will remain a central focus of FDI efforts over the next decade, and building on existing linkages and goodwill, we should focus efforts on making investment in NI more attractive to USA investors. This could be done through a range of measures:

o Develop USA customs clearance procedures for passengers at Belfast International Airport (similar to Dublin/Shannon) prior to departure

o Consider developing a ‘free zone’ around Belfast International Airport, similar to Shannon (perhaps linked to a simplified planning zone)

o Devolving the Air Passenger Duty tax to NI (as highlighted above) – the current tax (and potential future increases will create significant competitive disadvantage for direct USA flights out of NI compared to Dublin

21 January 2011