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; and
- 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:
- 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.
- Low earnings levels, particularly in the private
sector.
- High levels of economic inactivity, and significant
pockets of deprivation.
- High dependence on benefits.
- An economy where the public sector is a dominating
feature, with around 32% of employment in the public sector (GB
average is 21%).
- Relatively low levels of enterprise and start-ups.
- 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.
- 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; and
- 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 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.
UK AIR PASSENGER DUTY RATES
| Band A | 0-2,000 miles from London
|
| Band B | 2,001-4,000 miles from London
|
| Band C | 4,001-6,000 miles from London
|
| Band D | over 6,000 miles from London
|
| | | |
| |
| Rates of duty for 2009-10 and 2010-11 are as follows:
|
| Band | Reduced Rate
| Standard Rate |
| 2009-10 | 2010-11*
| 2009-10 | 2010-11* |
| Band A | £11 | £12
| £22 | £24 |
| Band B | £45 | £60
| £90 | £120 |
| Band C | £50 | £75
| £100 | £150 |
| Band D | £55 | £85
| £110 | £170 |
*took effect 1 November 2010
14. Forecasts up to 2015-16 indicate APD will double over
this period (as the UK increases revenue from £1.9 billion
to £3.8 billion), thereby further disadvantaging travelers
departing Northern Ireland airports.
15. Forecasts up to 2015-16 indicate APD will continue to
rise from the £1.9 billion in 2009-10 to £3.8 billion
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:
- Relatively expensive cost per job—c £17,000/job,
EZs varied in nature—the urban zones were the most expensive
(with land reclamation costs).
- Reduced rates offset on some/many occasions by higher rental—much
of the benefit was accrued by investors and landlords.
- About one third of investment and one quarter of jobs created
within EZs were "short distance transfers" eg displacement.
- 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).
- 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:
- Develop USA customs clearance procedures for passengers at
Belfast International Airport (similar to Dublin/Shannon) prior
to departure.
- Consider developing a "free zone" around Belfast
International Airport, similar to Shannon (perhaps linked to a
simplified planning zone).
- 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
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