Corporation Tax - Northern Ireland Affairs Committee Contents

Examination of Witness (Questions 153-189)

Q153 Chair: Mr Smyth, thank you very much for joining us today. I think you're probably aware that we're looking at a couple of issues at the moment in Northern Ireland; one is the corporation tax issue, with particular reference to the rate in the Republic of Ireland, and the impact that has on Northern Ireland, but we're also looking at the wider aspects of attracting business, jobs and prosperity to Northern Ireland, and we're looking at the enterprise zone concept, so we're very pleased that you were able to join us today. Would you like to begin by introducing yourself and telling us a little bit about your work with the CBI?

Nigel Smyth: Yes, thank you very much indeed. I am Nigel Smyth, the Director of CBI Northern Ireland. I am delighted to be back again; I was here in November on the corporation tax. We have submitted a short paper. I was going to take a couple of minutes just to say a little bit about some of the context of that. Something interesting that I may touch on is that since we submitted the evidence, we have actually published, with seven other business organisations, a manifesto or a jobs plan, as we've called it, obviously to try to influence our political parties in the run-up to the election, but also in terms of a consultation currently under way in Northern Ireland on economic strategy and also in terms of our budget. There may be some elements in that which are relevant to the discussion today.

As I say, we have submitted a short paper. It's fair to say that when we were consulting our members on this, there was a degree of difficulty around the vagueness of this, because historically, looking at enterprise zones, they have been fairly localised, and very much focused on urban regeneration; most of them were in the 1980s and '90s, so very localised on the back of that, but our understanding of what the UK has referred to is Northern Ireland as an enterprise zone. So we had a little bit of trouble getting our hands around that one on the back of that.

Clearly, we were aware that, last time around, enterprise zones traditionally had three main features: one was enhanced capital allowances, up to 100% allowances; there was the whole area of rating relief; and there was also simplified planning. We have highlighted in the paper the evidence from these. I was a little surprised, but there was quite a lot of academic evidence questioning the effectiveness of enterprise zones previously. Clearly, there were benefits in terms of job creation and indeed in terms of property development, but it was quite clear from quite a variety of academic evidence that they were relatively expensive, in terms of cost per job, and there was quite a great deal of local displacement from the vicinity. Also, quite clearly landlords were one of the primary beneficiaries of the rating relief; so when the rates went down—in fact they were zero for companies—they found that the rental went up instead on the back of that. Indeed, Members may well be aware that there were two reports out earlier this week from the Work Foundation and the Centre for Cities that had similar conclusions: they didn't create enough jobs, they were too expensive, and in many cases the benefits were short-term. Indeed, they argued that there was significant local displacement on the back of that.

We would also argue that the whole debate around economic development policy has moved on fairly considerably over the last 20 or 25 years. There is a much greater focus, certainly over the last decade, on developing capabilities within companies, particularly around innovation and skills. The cost per job over that period would have come down quite significantly.

However, in terms of having Northern Ireland as an enterprise zone, it could provide an interesting marketing tool, but in terms of effectiveness it would very much depend on the incentives that were within that. We highlight that there may be potential for sector-specific incentives. We as an organisation are not too sectorally focused, but we gave one example in our paper—the film industry; there could be particular tax incentives to help that develop. We have a young, flourishing film industry, but some additional tax breaks around that would actually help develop that further. There may be other things from other sectors on the back of that, although I would say that, other than the tax side, a lot of the initiative to support those sectors, whether it's in the food or the ICT sector, are likely to be in the control of the Northern Ireland Executive in terms of innovation policy, skills policy, links with the universities, et cetera, on the back of that.

My final point at this stage, Chairman, is that we would argue that there should be very clear objectives about what we're trying to do here in terms of Northern Ireland and in terms of what is reflected in the jobs plan. This is about increasing high­quality foreign direct investment; it is about encouraging and accelerating the growth of the indigenous enterprises; it is about enhancing productivity; and this is very much about increasing exports. Our own analysis, as I set out in the jobs plan, is that we probably need to double the rate of our exports. In the last 10 years, Northern Ireland exports have grown by about 30%; we believe that, to hit the job target we have set out, our exports need to grow by about 60% over the next decade. That is clearly where the focus has to be. In the last decade, we have seen a lot of employment creation, but that has been very much driven by strong growth in public expenditure that is not going to be repeated and by strong growth in credit, retail, and, indeed, the whole housing boom and bust that we've come through. None of those are likely to be repeated over the next decade, so we're very much looking at policies that can encourage investment on one hand and exporting on the other hand.

Q154 Chair: That would be for the whole of Northern Ireland? You wouldn't see breaking it up into bits as advantageous?

Nigel Smyth: Absolutely. We have looked at this purely strategically as what we have to do in a Northern Ireland context. Clearly, some people may argue that we look at disadvantage, but we see it on a totally different level. The challenge is that it's a Northern Ireland challenge.

Q155 Ian Paisley: On one level, Nigel, the circumstances in which Northern Ireland finds itself in 2011 are very different from the circumstances in which the UK found itself in 1980, when enterprise zones first came along. From what you are saying, am I right to take it that it's a bit of a misnomer, and it's not really an area where we should be going?

Nigel Smyth: Yes, I think that is probably a correct assessment. Certainly, we need to have much more focus. This is all about encouraging investment and exports. We have in Northern Ireland, clearly, significant areas of disadvantage and required regeneration. However, we do not think the focus of another enterprise zone should be focused in that area. It should be trying to focus on: "How can we help encourage investment generally, and how can we export our way out of this?" Just focusing something on local land regeneration, addressing derelict property, is not going to be the answer to Northern Ireland's problems. I should say at the outset that we believe—this is why our manifesto is called the jobs plan—we have a very significant challenge, in terms of rising unemployment, particularly given the number of young people coming out from schools, colleges, and universities. We believe that over the next number of years we're going to have very significant problems. We are already running at over 20% youth unemployment. We believe that will continue to increase over the next number of years.

Q156 Lady Hermon: Has the CBI actually submitted that analysis of the Secretary of State, Owen Paterson's, suggestion? He's held this idea for an awfully long time, before the general election and since it—the idea of an enterprise zone across Northern Ireland. Isn't he aware of the CBI's approach to this enterprise zone?

Nigel Smyth: He is aware of our jobs plan. That is not just the CBI; that is seven other business organisations on the back of that. Clearly, we understand that there is a paper, to which the Committee has referred, that is not in the public domain yet, that has been produced by the UK Government, looking at the rebalancing, looking at an enterprise zone, looking at the whole area of corporation tax, and various things. That is not out for public consultation. Now, clearly, we will respond to that when it does come out. Our document was only published on 2 February, so it's a fairly recent document, and it is out in the public domain, and I am happy to pick up any particular questions that there are around that.

Q157 Oliver Colvile: First of all, thank you very much for coming to see us again, and I hope it was not a difficult journey over. I should declare an interest in that I have an interest in a public relations company that dealt with a lot of property redevelopment and things like that, in which I have retained my shareholding. What I wanted to ask you, before I get on to the main substance, is this. We had Michael Heseltine come to speak to us the other day. He was obviously the Secretary of State for the Environment at the time when the original enterprise zones were set up and created. One of the things that he talked quite a bit about was the necessity to regenerate brownfield sites in London and Liverpool, and places like that. We got the distinct impression that frankly, if he were doing it now, it would be a different story from what it was in the 1980s and the 1990s. Are there, do you think, large parts of Northern Ireland that need that kind of infrastructure regeneration, or would you say that it has also moved on to skills and other areas?

Nigel Smyth: Clearly, it's moved on to skills, but we have areas, particularly in North-West Belfast and in Derry/Londonderry, where there will be inner-city areas, very significant areas of deprivation. When you're dealing with investors, quite often they are looking for neutral areas. For many of these areas, while we clearly want to encourage local regeneration, part of the challenge is to increase the levels of mobility of the people in these areas to come out into the centre of Belfast, where a lot of the companies are going, and a lot of the service industries are going.

There is clearly a very significant problem in those areas of disadvantage around skills. We have very significant problems around literacy and numeracy. Last summer, 43% of our GCSE students came out without an A­C grade in Maths and English. Most of our members will not be recruiting those people, unfortunately. It's a very competitive labour market. Indeed, in our jobs plan, we do say that we need a radical improvement in those areas, and indeed in the attitude to the people who are coming out. The answer is yes, there are some pockets, but our view is that there is a bigger picture. If we're going to grow the Northern Ireland economy, it's going to be export-driven. As our jobs plan over the next decade, we have had Oxford Economics doing some assessment; we wanted to come up with a figure that was reasonably realistic and that we could stand over. We've talked about 94,000 jobs coming from several key export­driven sectors. Half those jobs will be at local small companies—it's the spin-off effect, it's the supply chain—on the back of that.

We know that if we're successful on the exporting, that will actually create a lot of jobs in the local industry. We've seen the reverse of that. We saw that when Seagate closed one of their factories in Limavady, it had a devastating impact in the local town, in terms of local retailers, local suppliers, and various things. We want to see a mix of foreign direct investment, as well as trying to accelerate the growth of our existing businesses.

Q158 Oliver Colvile: What do you see as the benefits of an enterprise zone?

Nigel Smyth: The key question is what is going to be in it. The argument is that you have to do something on the tax front. You're doing a lot of work around the corporation tax; that is seen as the most significant transformational action in Northern Ireland. We would argue, in terms of our response to the current economic strategy that is being developed, that there are four or five other transformational actions, all focused within Northern Ireland, very much about streamlining government, making skills more relevant, the planning regime, and the whole employment burden on companies, where the costs and risks of employing people are, we believe, now just prohibitive and are major barriers to a lot of small companies in particular.

Q159 Oliver Colvile: And how would you measure success?

Nigel Smyth: The success would be actually creating jobs. The forecast would indicate, over the last decade, we've created about 12,000 jobs a year; current forecasts are indicating that we're only going to create 5,000. Our plan would be creating about 9,500 jobs a year. Success will be reflected by exports. We have got figures in here of exports growing by about 60% over the next decade. If we achieve that, we believe we will achieve this broad outline of significantly higher levels of growth in employment, and indeed in productivity in a number of our companies. Hopefully that will then feed in. We do need to do a lot of work on skills. We need to join up those people who are looking for work, the unemployed. The changes we're going to see in the welfare system will clearly bring more people on to the claimant count; there is a lot of hidden unemployment in Northern Ireland. I think this will shake that out, too. The challenge will be linking all these things together.

Q160 Gavin Williamson: You've talked a lot about being export-driven, and obviously about a lot of schemes to support driving exports ahead; surely the thing that is probably most beneficial to most exporters is a weak pound. Do you think that is going to have a significant effect in terms of the Northern Irish economy over the next few years?

Nigel Smyth: Absolutely. That has to be a key strength, so there is a real opportunity to take advantage of that. A couple of other responses: In terms of schemes for supporting exporters, our development agency spends probably in the order of £3.5 million on export support. Over the years, restrictions from Europe, and various other things, have restricted some of the support programmes. We believe that in the Republic of Ireland, Enterprise Ireland spends maybe €50 million on supporting exports. We believe that Scottish Enterprise is spending £20 million to £25 million. Now, even with the size of the populations, we certainly believe going forward that we need to be doing more in the export space. It is not just about things like trade missions. It is about enhancing capabilities, about sales and marketing expertise, and about helping those companies that are already growing to grow more. It's about helping those companies that are not exporting to move into the export markets. That's maybe the final transformational change. We actually do need an export strategy. We don't actually have a strategy at the moment.

The final comment is that our exports are probably lagging behind the UK. The big companies, the internationally focused companies, clearly are starting to pick up business on the back of the weak sterling. The first place a lot of our small micro-businesses are going to export to is the Republic of Ireland and, clearly, we're suffering. We're actually seeing sales go down there. Our exports to the Republic have gone up in the order of 60% to 70% over the last decade; it's one of the most successful markets. Clearly, with the problems in the Irish economy, that has been very difficult. Some of our construction companies, and other companies, have actually been reorientating themselves. The answer to your question is absolutely, a weak pound gives us a good opportunity.

Q161 Mel Stride: Welcome to the Committee. To pick you up on the point about the effect of the economic decline in the Republic on Northern Ireland, can you tell us a bit more about that and your assessment of the impact? Can you quantify that in any form?

Nigel Smyth: I can't quantify it. Let me just make a couple of comments. My position in terms of the intelligence that we would have, looking at everything in Northern Ireland, is that Northern Ireland is lagging quite significantly behind the UK recovery. There are two main reasons. First, we have seen this boom and bust in the property market. That is not just an impact on the construction sector; there are a lot of companies, particularly in the business and professional services—architects, estate agents, solicitors, banks, auditors, accountants—who did very well for many years on the wheeling and dealing in the property market. That now is totally gone. So that is a very major impact. Indeed, that is actually impacting certainly on tens, if not maybe a hundred or so, trading companies who, over the last decade, have been putting money into property as a pension scheme, but they're now finding that their trading business is keeping that property alive, and that that is holding back their trading business.

The other reason we are lagging is because we have been increasing our exports to the Republic. They went up to something like £2 billion; they have fallen back to about £1.7 billion. At the same time, we have had a lot of people, particularly construction-related, in the Mid-Ulster area, but other areas too, who were actually travelling, and working, in the South of Ireland. To put it in context, back in 2006­07, the UK was building about 140,000 houses a year; the Republic of Ireland was building 93,000 houses a year, for a number of years; they are probably building less than 10,000 houses this year. You can understand that that is their biggest problem: massive capacity. Indeed, Northern Ireland was taking a share of that, both in terms of some supplies, but also with regard to the fact that a number of people were working down there. Traditionally, you used to hear several years ago they were getting about a pound for every time they laid a brick—good business, but that has just gone. So that is why we have taken quite a significant level of pain on the back of that.

Q162 Jack Lopresti: You've offered suggestions for a very wide range of incentives for business in Northern Ireland. What would be your top priorities?

Nigel Smyth: My top priority clearly would be around corporation tax. We see that as transformational. Other than that, what I would probably tend to rule out is anything to do with property incentives and also things like national insurance. We see those as having too much deadweight and not supporting those companies that we need to. What we need to do is encourage investment, so any incentives: things like capital allowances should probably feature very prominently, moving from an existing investment allowance—I'm not sure if it's £50,000 or £100,000—and putting up to a million pounds, or even two million.

In our consultations, I've been speaking to a number of small and medium-sized companies of about 50 people, who would do quite a lot on the R and D and innovation side, and when asked, "Do you want a bigger R and D tax credit or investment allowance?" they all immediately went for investment allowance. It's a lot simpler and helps their cash flow quite quickly, which is going to be very important, in terms of where we are with access to credit and various things. We need to encourage investment. We need to encourage innovation, so our plan B, if we fail on corporation tax, is certainly enhanced R and D. Clearly, you're aware of the existing R and D tax credit; we need to do something much more significant on that one, but I think we've improved a lot with innovation in recent years, which is maybe not fully appreciated.

The final area is whether there is anything we can do in tax to help exports. Again, we had supported something in terms of enhanced tax incentives or reliefs on training for marketing and sales people. We have never taken that through in terms of the technical issues of doing that, but that was trying to focus incentives on areas where we have strategic weaknesses in Northern Ireland, so you are trying to change behaviour and trying to encourage more investment in those particular areas. As to a broad national insurance cut, that would be very nice—I'm sure my members would love it—but it would be fairly expensive and it certainly would not reward and incentivise the type of activity that we're looking for.

Q163 Ian Paisley: Do agri-foods form any part of your delivery plan?

Nigel Smyth: In terms of R and D, absolutely; Northern Ireland Food & Drink were part of this. We do see a number of people who have written off the food sector, but it's a very, very important sector in Northern Ireland. There has been £180 million of investment over the last 12 to18 months. In that, there were larger companies; we have one of the largest chicken processing operations in Europe, probably, in Moy Park, now Brazilian-owned. We have significant strengths in the beef and dairy industries. We have some natural strengths in that area. Indeed, it's a very innovative sector; some of the best managers that I come across are in that sector. There is a long supply chain on either side of it, so we would see opportunities in that sector, too.

Q164 Ian Paisley: It is too often forgotten that it is a sector that actually delivers growth. It's one of most successful export businesses, when you consider pork products.

Nigel Smyth: Absolutely. A lot of their exports are still claimed as exports, but they are in GB. There is still a big shortfall, in terms of the food been imported into GB, so they see a big opportunity there. Clearly, they are also exporting into Europe too, but certainly over the last couple of years, when many other sectors, like manufacturing, fell quite significantly, the food sector, the food processing sector, and the drinks side, was one of the few sectors that continued to grow, albeit at modest rates, but we do see that as a fairly key sector going forward.

Q165 Dr McDonnell: One of the suggestions that you've made in your evidence that should be considered in any enterprise zone is ensuring that measures are aimed at achieving clear objectives. What do you think those objectives should be, if an enterprise zone is introduced?

Nigel Smyth: I've probably already covered that. It is very much about how we can enhance investment, increase exports and, arguably, increase our productivity? Those are the key; obviously we need more skilled people, but it's about investment and exports; for me, those are the two key strategic issues that we need to focus on. Whatever incentives we are looking at that could go into the pot, that is certainly what we would be keen to see.

Q166 Dr McDonnell: You've already covered this, but just to probe a little bit further, you said that investment and exports are your key aims; where would you see jobs in that?

Nigel Smyth: Jobs are fundamental. At the end of the day, we're only going to achieve more job growth if we export more. This is a jobs plan; this is about trying to hit 94,000 jobs, but doing that is not going to be driven by local consumers and various things; the vast majority of this is going to be driven by increased exports. We may get some job substitution or some supply substitution, but that is not going to be the key strategic driver. That has been tried and we need to continue to drive it. This is all about selling more goods and services, including tourism, outside of Northern Ireland, and bringing more money into Northern Ireland.

Q167 Dr McDonnell: How big a measuring factor would you see the jobs to be? Would you see the jobs created as being the main factor and measurement, or would you see it as being qualified along with some of the other factors?

Nigel Smyth: Ultimately, it has to be the key factor, but you can't just go in and say, "Yes, we've got a target for jobs." The issue is how you can achieve those jobs. Our argument is that achieving those jobs is about encouraging more investment, having more success, and taking more market share in global markets. It's about internationalisation. It is about having things in place that are going to improve Northern Ireland's connectivity; that's why we touch on things like air passenger duty and various things that we think are very significant. Ultimately, this will come down to increasing the levels of employment. Northern Ireland Food & Drink, Construction Employers Federation, Momentum, which is our ICT federation, the IOD, the Chamber of Commerce, and the Northern Ireland Independent Retail Trade Association will benefit by the success we have in exports and various things. A lot of local companies will benefit from that through the supply chain. If we attract foreign direct investment, a lot of small companies will benefit.

That goes back to where the Republic of Ireland sits. It's still a very strong economy in terms of its international businesses: 140,000 direct jobs, 100,000 indirect. It will grow its exports, according to the press, or their export association, from £160 billion this year to £170 billion next year. That growth is the total of Northern Ireland exports, so don't rule out the Republic of Ireland. It has severe problems in the construction and the financial sector; it's the international and food sectors—its export sectors—that are actually keeping it afloat at the moment.

Q168 Dr McDonnell: Can I ask you maybe a cruel question? When you raise those questions and set those objectives, what measures do you think the Northern Ireland Executive have taken to help meet those objectives that you have rolled out for us? Pass?

Nigel Smyth: No, I'm not going to pass. I would say "disappointing"; I could be stronger than that. Clearly, we have just seen a draft budget. We have a very difficult budget and no-one is underestimating that. The Executive are saying that they are putting the economy at the core of their priorities. In our detailed response, we believe there are significant shortfalls, in terms of DETI, which is going to provide support to Invest Northern Ireland. Its document says that it will not be able to support all the projects that we need, yet despite that, we probably have the best pipeline of potential foreign direct investment on the back of that. There is no doubt that skills are going to be absolutely critical here; part of that is for indigenous, and part of that is for foreign direct investment. There are serious threats to our Assured Skills Programme, and to adult apprenticeships, which they've said they're going to close, so their actions do not reflect their words in the document. The Executive published their draft budget statement at an Executive level in December, but the departmental budgets do not reflect what was said there. This does give us serious concerns.

Having said that, the amounts of money that we're looking at in a budget that is in excess of £10 billion, we are looking at sums of money of £10 million, £15 million or £20 million here. That could actually go a long, long way in terms of the impact it could have on jobs. As I said earlier, if anything, Invest Northern Ireland is going to have to move back. They are at 95%; I know Invest Northern Ireland is following me in, so it's a question that you can put to them. Our understanding is that they are something like 95% committed, in terms of their funds, already into next year. They've been very supportive through the recession; things have not been as bad as they could have been. Giving them an additional £6 million to £8 million next year would actually probably double the amount of money they had available for supporting companies, exports and innovation. There are threats in their budget that they're going to cut innovation support. There are threats within the Department for Employment and Learning that they're going to cut the schemes for innovation and some of the partnerships between FE sectors and businesses. We've actually come a long way over the last decade on the innovation and the links between business and the further and higher education sector, and we would be extremely concerned that we're going to be going backwards over the next few years, at a time when we need to be doing absolutely everything to support and encourage the economy.

Q169 Dr McDonnell: You are telling me, basically, you would give a bit more money to Invest Northern Ireland—personally, I agree totally on that; I feel that it has been strangled—and you would also give a bit more money to R and D and training?

Nigel Smyth: Into DEL?

Dr McDonnell: Yes.

Nigel Smyth: On R and D, I think there has probably been enough money spent there, to be fair. If we look at innovation R and D, we were certainly lagging way behind the UK 10 years ago; our business expenditure on R and D was about 0.6% of GDP, compared to the UK, which was 1.3% or 1.4%. According to the latest figures in the economic consultation, Northern Ireland is now up to 1.1%, compared with the UK at 1.3%. That's very good, if we consider that Northern Ireland does not have a big pharmaceutical industry. If you look at the size, we have got a lot of traditional sectors, such as the food sector. Yes, it spends money on innovation, but it is not spending massive money on basic research into various things. I actually think we've got a very good track record in innovation. There is a benchmark in here about how innovative our companies are. In Northern Ireland, the measure is 55%, and the UK level is 58%. Yes, we're behind, but we're not massively behind. I think we've actually made quite a lot of progress. We need to continue to invest in that. The bigger worry would be on the skills side. We've got a lot of work still to do on skills, and particularly the relevance of skills to the needs of an export-driven economy.

Q170 Dr McDonnell: If we put R and D, skills and Invest NI aside, are there any other points or measures—anywhere else you would point the finger, in terms of what needs to be done?

Nigel Smyth: The other area that features in our job plan is around planning, particularly for large projects. The planning system in Northern Ireland—it is totally devolved—has made a lot of process on the small and medium applications. When I say "progress", I mean that they have actually achieved their performance targets for the first time in probably over a decade. They are not achieving that for the large applications. That is impacting on renewable energy, tourism, retail and a number of other key sectors and various things. We do need to speed that up. Part of it is just that the processing is very long; part of it is, we believe, that there is too little flexibility in some of the planning policy statements. There is a current planning policy statement on tourism out for consultation—we've just responded to it—which, again, we believe is going to be too inflexible. If you don't get the planning policy statement, and if you make it too inflexible at the start, you've got a real problem down the line. That's what we're finding.

Q171 Naomi Long: There are two issues that you've raised that I want to get a bit more information on. First, with respect to the budget, I don't think that anyone would question that the members of the Executive are all committed to trying to drive forward economic development, so where do you see the issue really lying? I mean, I have a personal view that the approach to the budget has been to salami-slice across everything, so the good and the bad get cut equally. It avoids the very contentious decisions, but it also unfortunately means that some very productive stuff takes a hit, rather than being prioritised. I would be interested in your perception of why, given that there has been this drive throughout the programme for the Government's and the Executive's general commitment, the issues that you highlighted are not being prioritised. The other issue is skills. You mentioned the mismatch of skills, and people coming out of further and higher education establishments and so on, compared to what employers want. How much engagement is there between people like yourselves and constituent bodies on the one hand, and education establishments—individual universities and colleges—and also DEL on the other hand, in terms of trying to form what the skills policy and, indeed, the educational direction should be, so that there is a better fit between skills, education and business?

Nigel Smyth: In terms of the budget, yes, there has been salami-slicing. Clearly there have been some very difficult challenges. In our response, we believe first of all that there has not been enough re-engineering and restructuring. I have looked at every budget from each Department at least twice; I am probably one of the few people in Northern Ireland to have done so. Those were my sad days in January. They're like chalk and cheese. Most of this is to do with natural wastage taking quite significant numbers out; it's in nobody's interests to go and make people redundant. There are other Departments that are literally saying, "We're trying to protect jobs in the public sector," where there are no administrative savings and there are obvious areas for them, and where they have laid out very clearly that they are cutting services on the back of that.

To be fair to DEL, the Department for Employment and Learning, they are taking posts out, et cetera. Cleary, there are complicating factors, because of the tuition fees and various things and how that works, so it's a little bit unclear how this will all work its way out, but it raises significant concerns for us. Our response is that 50% of the costs are labour costs. The Executive will argue, "Look, we can only control the Northern Ireland civil service, and 87% of the jobs are in the broader public sector under national pay agreements," but if you are not going to address that, it's going to be very difficult to manage your wage bill, other than by managing through natural wastage, et cetera. We don't think they've gone far enough on managing labour costs, or on the reform side.

There is a mixture between Departments. Some have done the salami-slicing; others have sat down more strategically, to be fair, and looked at it. In the case of DETI's budget, again, there was an Executive decision on introducing a damages Act on pleural plaques for England and Wales. It went to the House of Lords, which said "We're not going to have a Bill." DETI now has a budget of £12 million over the next four years, because the Executive propose introducing legislation. The initial budget looked good, but when we got the departmental budget, there is a piece of legislation coming through, which we think unfortunately is going to go through the Executive, and DETI is going to have to pay out over £12 million. We think it will be a lot more than that over the next number of years to compensate pleural plaques, which is a benign disease. Clearly people have worries about it, but this is a major issue. In Scotland, it has been challenged in the European Courts, and we think it's going to reward lawyers very healthily, but we think it's £12 million that could actually go into economic development and be a lot more productive.

Your second question, if I may, was on skills and the mismatch. Yes, we engage. We engage at the strategic level and the cross­sectoral. To be fair, in Northern Ireland, we have, as in the UK, about 24 sector skills councils—too many, from our perspective, as we have argued for some time. We also have other forums at a regional level. We have argued for some years now that we need to rationalise that; part of the Department for Employment and Learning's budget is actually to rationalise that, so we actually agree with that. We need to prioritise that. We need to be looking at the six, seven or eight key sectors where we're going to see the most significant growth and the most significant value created; that's where we should be putting our resources. That is not to say you ignore some of the other sectors, but this is all about prioritisation. Rather than cut the adult apprenticeship scheme, we believe that, yes, you could cut it in two; you could prioritise it in those sectors where you've got the biggest opportunities coming forward. The worry is that two to three years down the line, when things start picking up, we're not going to have the people there to reward that. I think over the last four to five years, particularly with the further education sector, there has been a lot of engagement in that space; I think the challenge now is to cut through that and prioritise where we're going to put our resources.

Q172 Lady Hermon: Can you elaborate on those six or seven key priorities for skills? What would you identify those to be?

Nigel Smyth: They probably were the sectors set out in our jobs plan. My understanding is that we still have the construction sector as a priority. I would take the view—I may upset my construction members here—that the construction sector will not be the priority that it would have been over the past decade, when we saw significant growth. The sectors we have identified here are, clearly, the ICT sector. I would argue that it is almost booming at the moment. It is a relatively small sector in Northern Ireland, but it has a lot of potential to grow; we think there could be about 10,000 jobs, and some good work has been done through their sectoral skills association, in terms of the whole area of creation. We're getting more people for the first time going back into universities. There was a major drop-out after 2001—the issue. There is the ICT sector; the agri-food sector, particularly for technologists, and there are other areas in there, too; the health technology sector, a small sector, but again growing strongly; and the whole area of tradable services.

Tourism quite clearly is a priority. We had a good draft strategy in June last year, but it has disappeared and we haven't seen it. It was an ambitious strategy to double the revenues from tourism over the next decade; we would have been very supportive of that. Clearly, there are also areas like clean, green technology and high-value manufacturing. We would certainly see the whole engineering sector, at the higher end, as being a significant opportunity and we have seen some significant investment in that sector recently. We do believe there is going to be a lot of competition for jobs; we will need more apprenticeships, with more technical people as well as graduates in those areas.

Q173 Mel Stride: Just quickly on this point of education and skills, in your opening remarks, you highlighted the low level of achievement, in your view, at GCSE and in secondary education, in terms of students gaining Maths and English. In the balance of skills mismatches, the lack of apprenticeships, and the problems that the employers have with those coming through secondary education without those basic Maths and English skills, how much of a problem is the education bit in that? It's a problem throughout the UK, it seems to me, and I'm just interested in your comments on it.

Nigel Smyth: It is. There is no doubt that there are a number of employers in the retail sector and the food industry who would do a lot of work in terms of remedial skill for these people. They have trouble with operatives—in getting anybody. That's why we brought in a lot of Eastern Europeans. They are keen to recruit local people, but many of them cannot read or write properly, so they would have their own schemes, and to be fair that has been supported quite strongly by the Department for Employment and Learning in terms of an essential skills strategy over the last number of years. There has been a lot of work doing that, but at the same time, every year we have another significant number of people coming out who don't have those skills.

It's also fair to say that a number of graduates come out who are pretty poor at filling in application forms and are not going to get through the interview process. I know this is not unique to Northern Ireland. It can be managed, but it's an additional barrier and an additional cost that companies have to take on board, which they shouldn't have to. They do not expect to have totally trained people, but they do expect to have educated people with basic skills. That's just an additional burden that they have. I suppose this is slightly unique to Northern Ireland: Northern Ireland is a very small market, so there are several companies in our food sector or our engineering sector who grow to scale and then they decide, "Look, we need to be closer to our market," whether that is in Wales, England or wherever. There are dozens of companies who have now developed operations in GB. They then have to make investment decisions: are they close to the market? Do they have these problems there? Do they have the planning problems? That is why we need to make Northern Ireland much more attractive. It's just another burden. It is going to be very difficult for those individuals. It's penalising them, because it's an extremely competitive marketplace and obviously a number of people do have those skills. Those people do not really have a great deal of chance, one would have to say.

Q174 Mel Stride: Getting back to enterprise zones, it's desirable to reduce corporation tax, in your view, because of the disparity with the South, among other reasons. Would you go so far as to say that if the Northern Ireland Assembly did not reduce corporation tax, an enterprise zone would not work? Is it an essential prerequisite to make the thing fly?

Nigel Smyth: Well, it depends on what you mean by "work." The corporation tax features in this document. All eight organisations have signed up to reducing the corporation tax. Clearly, we recognise that a cost would go with that, and there could well be legal issues and various things—we're awaiting the UK Government paper. That is a preference. That is seen as the transformational activity. That is seen as the one activity that will both help indigenous firms and bring in very high-quality FDI and really be transformative over the next 10 to 15 years. Clearly, if that's not going to happen—the decisions are outside our control—and for political reasons they don't decide to run with that, then there are other options, but they are less good options. Clearly things like enhanced capital allowances would be attractive for certain companies. You wouldn't turn your nose up at those, but they're not actually going to do what we believe is required to help us transform the Northern Ireland economy, to make it more self-sustaining. There is no way that Northern Ireland is going to end up paying its way, even after 15 to 20 years, but we can actually reduce the levels of subvention from the UK, which continue to go up every year. We are a burden on the rest of the UK; it would be nice to try to reverse that trend. I haven't seen any arguments that indicate that even if we did something on tax allowances, capital allowances, or R and D, that that would differentiate that, but clearly it would help a number of companies; it would help to accelerate growth. I hope that has answered your question.

Q175 Mel Stride: That's helpful, thank you. In your evidence, you allude to other countries that have had corporation tax exemptions. Could you tell us a bit about the countries you're referring to there? What criteria have they applied in those situations, and specifically do you think those approaches would meet with the EU state aid rules in respect of Northern Ireland?

Nigel Smyth: This is one that I might pass on, because I think you might be recalling our previous efforts back in October or November. I don't think we state that in our current paper on the enterprise zone. I know that that is an issue that Gibraltar, the Basque region and, clearly, our neighbours in the Republic are well aware of. I'm going to pass on that because that seems like a lifetime ago.

Q176 Mel Stride: One final quick question: the Government, as you know, have introduced a national insurance holiday for employers in respect of new business start-ups. Do you have any evidence on the ground of how that is working in Northern Ireland at the moment?

Nigel Smyth: It's not. Again, this is at a tactical level; my understanding is that it is for new businesses that have been created. It was announced last year. They would tend not to be members, if they were new businesses, of CBI, so I wouldn't be aware of that. It is clearly helpful, but it is not at the strategic level. Nobody is going to turn it down, but it's not going to do the things that we believe are necessary to help transform the Northern Ireland economy.

Q177 Naomi Long: Obviously, the issue of an enterprise zone carries with it some challenges. There were some, if you like, negative problems created around the previous incarnations of the enterprise zones. Clearly, we're not entirely sure whether what was meant by "enterprise zone" remains that same as it did in the 1980s, when the zones were piloted elsewhere. How would you go about minimising some of the problems that were identified with the notion of an enterprise zone in the past, such as issues of property speculation and deadweight, where people are essentially gaining benefit for doing what they would have done anyway? How do you try to eliminate that? Or do you think you simply carry that, and that it's a cost worth bearing?

Nigel Smyth: It is a very difficult one to answer, because it comes back to what we were talking about: what's going to be in the enterprise zone? The indication from the UK Government is that Northern Ireland would be considered as an enterprise zone, so that would be very different from where we were previously on that. I would say the big issue previously was that it was relatively expensive per job, but there was a lot of local displacement and various things on the back of that. The obvious thing that we would be putting into it is something at a broad level of tax. To repeat myself, corporation tax is the favoured one, but there may be other potential tax incentives to do with that, in terms of capital allowances, investment allowances, enhanced R and D tax credit, or something on a sectoral basis. We've given one example in our paper, in terms of the BBC and the TV industry.

It's a really difficult question to respond to until we decide what the initiatives are. That is why I said that if you decided to introduce something like a national insurance contribution measure for all companies, there would be a massive amount of deadweight, so that would not be something that we would be arguing for. Yes, I'm sure my members would love it, and I'm sure there would be some benefit, but it would be a very costly thing to do. When we were considering this—as I say, my members had difficulty trying to get their hands around this—we were very much focused on: "What are we trying to achieve?" It comes back to the fact that this is all about trying to encourage investment and accelerate growth in exports. That's what we need to be focused on. We need to be very conscious of the areas of deadweight around that, but until we decide on what the incentives are going to be, it's very hard to tell how you would address those.

Q178 Naomi Long: In terms of the incentives and some of the discussions we've had in previous weeks, earlier you said that jobs were at the forefront of this; it was about job creation. You've mentioned two things that I suppose are key drivers: there is job creation and there are exports. Do you think, if you're going to create an enterprise zone, that incentives particularly focused on those companies that are creating new employment and are exporting more is one way to try and eliminate some of the deadweight that could be associated with more broad-brush approaches?

Nigel Smyth: If that could be achieved, then yes. Obviously, you've got a very wide range of companies that are exporting. If I come back to job creation, we believe that we will only create jobs if we actually export more, because this is not going to be driven by local demand. Local demand will just shift around; there is not enough money in the economy. The only way actually to grow the economy is to sell goods and services outside Northern Ireland, or to bring significantly more tourists into Northern Ireland. That is our thinking on that. I wouldn't rule out something targeted at companies. I was out with a company last week, an £80-million or £90-million business in the food sector. They had ambition to grow to £200 million to £300 million. They had taken on five graduates this year, and were very driven by innovation. It is a company that most people probably wouldn't even be aware of. We were trying to tease out what more could be done on exporting. He's got a cash-flow constraint; he can only grow at a certain rate. Our view is: how can we help him to grow at a faster rate, to get him to where he wants to be? And yes, he did say that if there was an incentive—if we said, "takes a graduate on and we'll pay you to take on a second graduate"— he would have taken on another five graduates, if he were funded in some way to do that. That would help to develop his capabilities and he would grow at a faster rate, and I'm sure there would be a lot of spin-off benefits.

There must be ways to design a system where you've got growing companies. It could be, "If you take a graduate on, we will fund a second graduate." I'm conscious of the deadweight argument—"Well, next year, instead of taking five, I'll take two, and I'll get two for free." There is an opportunity; that's what we're trying to get our heads around. All Government policy is trying to minimise the level of deadweight. What we have said in our jobs plan is that we believe we need to develop maybe 100 or 200—we didn't know what sort of number—of what we call "gazelles", really growth-led companies. In Northern Ireland, we think there is a fairly small handful of them; there is just not enough. Our challenge is to grow more. There are significant risks to exporting. For a very small Northern Ireland company, the easiest way to export is to drive down, across the border, into Dublin. It's an expensive operation to be driving and sending people over to GB, so we have to reduce the risks. We have to make it easier. We have to develop their capabilities, skills and knowledge of the marketplace, et cetera. There may well be some way of designing something that has a very strong employment relation to that. I would link in with "You're the export focus."

Chair: We're over time already. I propose running to four o'clock, if that's okay, but we will have to finish then.

Q179 Ian Paisley: You said something that I wrote down. I was wondering if anyone was going to pick up on it, because it alarmed me. You said, "Tourism: we had a good strategy in June; it has disappeared."

Nigel Smyth: Let me correct myself; we had a good draft strategy that was sent out for consultation by the Department for Enterprise, Trade and Investment in May or June. We responded to it. We liked it. It was about doubling revenues. There were a couple of areas we felt needed prioritisation. We have heard and seen nothing of it since.

Q180 Ian Paisley: It alarms me that you've heard nothing of it since. Tourism is major in my constituency, and it's a major driver in the Government strategy for the way forward. Why do you think you've heard nothing?

Nigel Smyth: There are a lot of things put out for consultation in Northern Ireland, and many strategies, that take a long time coming through. In terms of our argument for one of the areas for transformational reform, it is all about agility and can-do, and about making sure that these things happen at a much faster pace, including strategies. Strategy in Northern Ireland is great; we used to launch boats, but we now launch strategies. We've failed to launch this one.

Q181 Ian Paisley: But unfortunately our strategies sink, just as quickly as some of our boats.

Nigel Smyth: It is disappointing, but things in Northern Ireland are extremely laborious and slow. That is a competitive disadvantage.

Q182 Ian Paisley: Do we need a Tourism tsar?

Nigel Smyth: Arguably yes, but I would also say, as part of that, that we need fewer Departments. In terms of economic development, the Independent Review of Economic Policy said we should knock together the Department for Employment and Learning and the Department of Enterprise, Trade and Investment. We've just seen a consultation on the economic strategy. There is nothing in there about governance reform or departmental reform. There is a very strong silo mentality in Northern Ireland, and that is reflected very strongly in the recent budget consultation; nothing in it was joined up. There were no opportunities to look for synergies between Departments. There are some key weaknesses there, which we have to continue to try and convince our political friends to move on.


Jack Lopresti: Is this the finale question, maybe?

Chair: Well, I hope not.

Q183 Jack Lopresti: Do you think that an enterprise zone could be used to force the different players in Northern Ireland decision-making to pull together in the same direction?

Nigel Smyth: That is a difficult one to answer; again it depends what is in the enterprise zone. One of the key messages in our jobs plan is that it is unique; it's the first time that eight main business organisations have come together. Part of that was the unity, a common message. Rather than us all producing different things in similar but different messages, the view was, "Let's have a very strong message signed up to by eight organisations." Part of the message is that we need to create confidence politically to encourage investment. We need more unity. We need more of a sense of purpose within the Executive and a clear sense of direction. The question is probably going to be answered by the economic strategy. The Executive have set up a sub-committee of the Executive, which has launched the current consultation, which is pretty woeful, one would have to say, and we can be very critical about that. However, there is an effort to bring the seven Departments together to look at this in a more joined-up manner.

This consultation is about priorities. It could have been put out a year ago, one has to say, so we expected there to have been more progress. We have a chance to influence that, and clearly that's what we're trying to do. There is some recognition that they need to get together. We want to see that recognised in the delivery. We would have liked to have seen it more recognised in their budget decisions, but we have a very unusual Government in Northern Ireland. I'm sure it's frustrating for those who are in it; it can be very frustrating for those outside it, trying to influence it. I'm not sure if the enterprise zone, as such, would help that further. There are other structural issues that could be taken forward in Northern Ireland that would hopefully address that. It is an important issue.

Chair: I am going to have to skip on slightly because of the time.

Q184 Kate Hoey: Whether or not we get an enterprise zone, how important is the competitiveness of air travel and the question of duty and the relationship with the Republic?

Nigel Smyth: It's absolutely critical. You talk about exports; whether that's tourism or exports, it's about international connectivity.

Q185 Kate Hoey: What is the CBI doing about that in Northern Ireland? Did you do anything, for example, when they had—I know it's pathetically small, but still—the £1 charge for drop off, and the £1 charge to be picked up at the international airport? Did the CBI make its protests known to the Spanish Government?

Nigel Smyth: It's very hard for me to criticise my members. We don't tend to get involved in that level of detail. There are bigger issues in there in terms of the air passenger duty. I dropped somebody off at the airport recently without paying my £1. They had to walk a little bit. I let my boss walk 400 metres—savings within the CBI.

Q186 Kate Hoey: Mr Smyth, you say that's only a minor thing, but in fact, in reality, it's another burden on travelling back and forward, which of course a lot of people do for their normal business, and your members do. Have you made this a hugely big issue—not that particular parking bit, but the general issue about passenger duty?

Nigel Smyth: Yes, and it has been going up the agenda in recent months, to be fair. Cleary, it's been reflected in the South. As you're aware, they have reduced it, or are reducing it, I'm not sure if it's this month or next month, to €3. The biggest concern is on our international airport, particularly on the US flights. In Northern Ireland, it's £60 and over £100 pounds in first class, and in Dublin it's going to be €3; that's a big differential. You've now got Continental jointly owned by United—United Continental. We have one service going out of Northern Ireland. It is very important for our tourism sector, and for the likes of Citigroup and the New York Stock Exchange, and some of the key sectors that we need to link into Northern Ireland. That US connectivity is absolutely critical, and it would be of strategic importance if there were any threat to that service. Dublin has something like 13 or 14 flights a day to the States. I think within the UK it's a burden, but the biggest burden, and the biggest concern that we would have is strategically with the international airport, and particularly with the States.

Q187 Kate Hoey: What's the CBI's official view of Invest Northern Ireland?

Nigel Smyth: Broadly, we're supportive. We've been very supportive of their last strategy. They did come under, we feel, a little bit of undue criticism from the Independent Review of Economic Policy, which said they should be spending a lot more money on innovations and R and D. Their existing corporate plan is spending a lot of money on innovation and R and D, and I don't think we felt that that was sufficiently picked up. Over the years, we think their strategy was broadly right. It's fair to say that they will have a new strategy starting in about a month's time. We would like to see that more export-focused. The issues that our members would have faced in recent years have been very much around the bureaucracy with the initial applications, and indeed when they're actually claiming the grants. Some of that has been reduced. In fact, they made some announcement recently to reduce that further. Much of that is controlled by European rules and various things; anything with European grants in it can be very bureaucratic, unfortunately. I've been with the CBI for 20 years and I would say that you will always find somebody with a criticism, but the feedback is as good now as it has been for 20 years, even with its predecessor organisations. It's certainly far from fault-free, but they are moving in the right direction and internally—you can ask them—they're going through some fairly significant changes to improve their processes and direction.

Q188 Chair: Thank you. Now for the very last questions, on a slightly different subject. Naomi.

Naomi Long: Just to refer back to the air passenger duty, obviously the other concern is about the passenger charge that's being levied at the moment at Heathrow, which is also now likely to be introduced in Gatwick for those who are not through-passengers going to other European destinations, but are actually flying to London specifically. That's going to have implications for business travel for people from Northern Ireland as well. I just want to raise with you the issue of the Daylight Saving Bill, a private Member's Bill currently going through Parliament, because I wrote to lots of business organisations, and indeed other representative bodies in Northern Ireland, when this was being debated, and it didn't seem to be on anybody's agendas. I had some concerns that there would be a cost to business if the Republic of Ireland and the UK ended up on different time zones, or other implications for business if we all ended up on a single time zone that is significantly different from the one we're on at the moment. I'm just wondering if that's something that the CBI has given any consideration, in terms of the cost that might be incurred by their members.

Nigel Smyth: It was, and you should have had a response from the CBI to your letter. I certainly sent one out; I hope that it was received.

Naomi Long: You were one of the few organisations that had it on their radar.

Nigel Smyth: When I say it was on the radar, to be fair, it did not feature properly on my members' radar. It was raised at our council meeting; we got very limited feedback on it. The view would be that we've probably moved on quite a bit in the last 25 years. It would not be the issue that is was, and we would not have some of the concerns that we had back then. It's fair to say that it is just not at the top of my members' agenda, so it is hard to get the feedback. The view was that if UK was going to move, we would be amazed if the Republic didn't move as well, but that would obviously be a decision for them. It would be very unusual if we had an hour's difference between Northern Ireland and the South of Ireland.

Q189 Naomi Long: And costly, in some cases?

Nigel Smyth: To be fair, I have to put my hands up and say that with all the other challenges out there—the strategic issues that we're trying to face—it's just not a prominent feature on people's radar. Maybe they don't realise how close we are to getting it, or not, and they will only wake up to it then, but from a business perspective, nobody was saying, "Hey, this is going to be dreadful." Clearly, talking about internationalising, we need to be exporting more, including into Europe. Our exports into Europe now are less than they were 10 years ago, if we exclude the Republic of Ireland, so there is a lot of work to be done there. Clearly, if you go on to the same time zone, and you all have the same day, that has to be helpful.

Chair: Thank you very much. We've kept you for an hour. Thanks for your very comprehensive answers. We're grateful to you for your evidence.

Nigel Smyth: Not at all, thank you for the opportunity.

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