COMMITTEE FOR ENTERPRISE, TRADE AND INVESTMENT

Report on the Committee’s Response
to the Department of Finance and
Personnel’s Review of Rating Policy

TOGETHER WITH THE MINUTES OF PROCEEDINGS OF THE COMMITTEE
RELATING TO THE REPORT AND THE MINUTES OF EVIDENCE

Ordered by The Committee for Enterprise, Trade and Investment to be printed 9 October 2002
Report: 1/02R (Committee for Enterprise, Trade and Investment)

COMMITTEE FOR ENTERPRISE, TRADE AND INVESTMENT:
MEMBERSHIP AND POWERS

The Committee for Enterprise, Trade and Investment is a Statutory Departmental Committee established in accordance with paragraphs 8 and 9 of Strand One of the Belfast Agreement and under Assembly Standing Order No 46. The Committee has a scrutiny, policy development and consultation role with respect to the Department of Enterprise, Trade and Investment and has a role in the initiation of legislation.

The Committee has power to:

• consider and advise on Departmental budgets and Annual Plans in the context of the overall budget allocation;
• approve relevant secondary legislation and take the Committee Stage of relevant primary legislation;
• call for person and papers;
• initiate enquiries and make reports;
• consider and advise on matters brought to the Committee by the Minister of Enterprise, Trade and Investment.

The Committee was established on 29 November 1999 with 11 members including a Chairperson and Deputy Chairperson and a quorum of 5.

The membership of the Committee is as follows:

Mr Pat Doherty (Chairperson)
Mr Sean Neeson (Deputy Chairperson)

*Mr Wells replaced Mr Campbell with effect from 3 October 2000.

*Mrs Courtney replaced Ms Lewsley with effect from 29 January 2001.

*Mr Armstrong replaced Mr Shipley Dalton with effect from 24 October 2001.

*Mr McMenamin replaced Mr Attwood with effect from 18 February 2002.

The Report and Proceedings of the Committee are published by the Stationery Office by order of the Committee. All publications of the Committee are posted on the Northern Ireland Assembly website: www.niassembly.gov.uk

All correspondence should be addressed to the Clerk to the Committee for Enterprise, Trade and Investment, Northern Ireland Assembly, Room 424, Parliament Buildings, Stormont, Belfast BT4 3XX.

É(028) 9052 1230; Ê(028) 9052 1063;
e-mail: committee.enterprise@niassembly.gov.uk

Report on the Committee’s response to the Department of Finance and Personnel’s Review of Rating Policy

Appendix 1 – Minutes of Proceedings of the Committee relating to the Report

Appendix 2 – Minutes of Evidence

Appendix 3 – Written Submissions

On 19 October 2001 the Confederation of British Industry (Northern Ireland) (CBI) wrote to the Committee for Enterprise, Trade and Investment expressing its concern at the potential removal of Industrial De-rating in Northern Ireland. The Committee met with the CBI on 30 January 2002 to discuss the issue and agreed to pursue the matter with the Minister of Enterprise, Trade and Investment. The Minister informed the Committee in his reply that the Northern Ireland Executive was planning a Review of Rating Policy in Northern Ireland.

On 27 May 2002 the Minister of Finance and Personnel, Dr Seán Farren, on behalf of the Northern Ireland Executive, announced to the Assembly that a public consultation exercise on the Review of Rating Policy had commenced. The review was to be wide-ranging and encompass many various issues related to Rating in Northern Ireland.

The only issue relevant for consideration by the Committee for Enterprise, Trade and Investment was that concerning De-rating for Industry. The Committee advertised in the Belfast Telegraph, Irish News, Newsletter and the Irish Times to seek comments on the Industrial De-rating element of the Review of Rating Policy. The Committee took written evidence from a number of organisations with a view on this issue (this evidence is attached at Appendix 3). The report does not include those replies that did not make substantive comment; however the Committee Clerk can provide a copy on request.

In addition, the Northern Ireland Hotels Federation copied its response to DFP, for information, to the Committee. It is not included in this report but is available on request from the Committee Clerk.

In addition to the earlier meeting with the CBI, the Committee supplemented this written evidence with a series of meetings with the Irish Congress of Trade Unions (ICTU), the Ulster Farmers’ Union (UFU), the economist John Simpson and the Department of Finance and Personnel (DFP). The transcripts (Minutes of Evidence) from those meetings are attached at Appendix 2.

Industrial De-rating was introduced throughout the UK in 1929 mainly as a response to growing competition in markets for manufactured goods from foreign countries. It was also thought that manufacturing was a property intensive industry and that a property tax would bear heavily on that activity.

In the early 1980’s the government recognised that the high cost of local electricity took the edge off Northern Ireland’s industrial competitiveness. In order to address this problem the government agreed that Industrial De-rating was still required, although it had been abolished in England and Wales in 1963.

According to DFP statistics the revenue forgone as a result of this policy is £64.3 million per annum. As an illustration of the effect of this policy DFP claims that if £64 million were to be made available this could reduce the non-domestic regional rate by 16%.

The evidence submitted fell into two main categories, those who felt that the financial resources raised by abolishing the current policy could be better utilised by the Executive, and those who wanted the current policy to continue.

Not surprisingly those businesses currently enjoying the benefits of Industrial De-rating argued for its continuance. The CBI, UFU, the NI Grain Traders Association, Bombardier Aerospace, GE McLarnon & Sons Ltd and NI Food and Drink Association argued that the additional costs of paying rates would have a detrimental effect on competitiveness and send some companies out of business. Bombardier quoted an estimated additional annual cost of £2 million adversely impacting their international competitive position and placing jobs at further risk. The CBI, in their supplementary evidence to the Committee, gave details of a survey carried out on their members. This survey concluded that only 8% of respondents believed that the abolition of Industrial De-rating would have no effect on their viability.

A differing view was put forward by both the Trade Union movement (ICTU) and economist John Simpson. In their evidence to the Committee both concluded that the current policy meant that financial resources were not being used to their best effect.

ICTU highlighted the £6 billion capital funding deficit which needed to be addressed by the Executive. The revenue raised by abolishing Industrial De-rating could go some way to helping fund government borrowing to deal with this capital investment need. ICTU also pointed out that the current Industrial De-rating policy was inconsistent with the Programme for Government’s aim to promote a knowledge-based economy given that the businesses benefiting from de-rating were largely manual-labour orientated.

John Simpson’s evidence to the Committee focused on the need to ensure fairness within industry in Northern Ireland. Many other industries such as tourism, financial services and those related to information technology did not benefit from de-rating yet made a significant contribution to the Northern Ireland economy. He also believed that the revenue raised from rating manufacturing businesses could be better utilised by the Executive, either in a more focused method to benefit the economy or by using the money as a lever for capital borrowing.

While concerned that businesses in Northern Ireland needed a competitive edge internationally, the Committee concluded that the arguments in favour of continuing Industrial De-rating in its current form were outweighed by those suggesting its removal. The blanket approach currently in practice meant that benefits to the manufacturing industry were spread too thinly and did not allow the Executive to focus resources were they were most needed. Other sectors of the Northern Ireland economy did not benefit from this concession meaning that the policy of Industrial De-rating was not fair in its application.

In addition, the Committee recognised that £64 million per annum added to the Northern Ireland Executive’s budget would permit borrowing on an unprecedented scale to improve public infrastructure projects such as roads and rail networks which would benefit industry and the economy in the longer term. For example, much needed improvements to the Westlink in Belfast could have enormous benefits to all businesses in or those businesses with dealings in the Greater Belfast area.

The evidence from CBI and others suggested that an immediate end to Industrial De-rating would have disastrous consequences for many small industrial businesses. The Committee agreed with that sentiment and concluded that a phased approach to the abolition of Industrial De-rating should be considered.

The Committee did acknowledge, however, that the farming sector of the economy is vulnerable to even small variations in profitability margins. Given the dependence on agriculture in Northern Ireland as a source of employment and export revenue the Committee agreed that farmers and agri-food producers needed to be given special consideration in this review process.

The Committee also acknowledged the Executive’s desire to promote more business start-ups (Programme for Government – Securing a Competitive Market (sub-priority 3) refers). The Committee is supportive of this concept and believes that Industrial De-rating should not be withdrawn from new small industrial businesses for a limited period of time.

The Committee has made five recommendations after considering this issue:

• The current policy of Industrial De-rating should be abolished.
• The current policy should only be phased out over a period of time. The Committee recommends that this period be 3 years (i.e. 75% concession for year 1, 50% for year 2, 25% for year 3).
• In order to encourage small business ‘start-ups’ the Committee recommends that new small industrial businesses be allowed a 3 to 5 year concession on their rates.
• A concession for de-rating businesses involved in the agri-food industry should be considered.
• The Department of Enterprise, Trade and Investment should consider the setting-up of a relief fund which will assist those businesses, particularly small businesses, most affected by the removal of Industrial De-rating in the short term.

PAT DOHERTY MP MLA
Chairperson

WEDNESDAY 30 JANUARY 2002 AT 10.48AM IN
ROOM 144, Parliament Buildings

Present: Mr P Doherty MP (Chairperson)
Mr B Armstrong
Mr W Clyde
Mrs A Courtney
Mr D McClarty
Dr A McDonnell
Ms J Morrice
Dr D O’Hagan
Mr J Wells

Apologies: Mr S Neeson (Deputy Chairperson)

In attendance: Mrs C White (Committee Clerk)
Mr M Anderson (Assistant Committee Clerk)
Mr R Anderson (Clerical Supervisor)
Miss A Fowler (Clerical Officer)
Dr P Gilleece (Assembly Researcher)

In attendance for the public evidence session at 11.08am: Dr I Morris, Mr M Ennis, Mr D Dobbin and Mr N Smyth (Confederation of British Industry (CBI)).

6.1 A delegation from the CBI outlined their concerns at the potential reintroduction of industrial rating for businesses in Northern Ireland.

Agreed – to issue a press release supporting the continuation of industrial de-rating.

Agreed – to write to the Minister of Enterprise, Trade and Investment detailing the Committee’s concerns and seeking his support within the Executive for the continuation of industrial de-rating.

TUESDAY 25 JUNE 2002 AT 10.22AM IN
ROOM 144, PARLIAMENT BUILDINGS

Present: Mr P Doherty MP MLA (Chairperson)
Mr S Neeson (Deputy Chairperson)
Mr B Armstrong
Mr W Clyde
Mr D McClarty
Dr A McDonnell
Mr E McMenamin
Ms J Morrice
Dr D O’Hagan Mr J Wells

In attendance: Mrs C White (Committee Clerk)
Mr M Anderson (Assistant Committee Clerk)
Mr R Anderson (Clerical Supervisor)
Miss A Fowler (Clerical Officer)

In attendance for the public evidence session at 10.53am: Mr B McClure and Mr S Pearson, Rating Policy Branch.

Representatives from Rating Policy Branch gave a presentation on the Review of Rating Policy to the Committee and answered questions raised by Members.

Present: Mr S Neeson (Deputy Chairperson) Mr B Armstrong Mr W Clyde Mrs A Courtney Mr D McClarty Dr A McDonnell
Mr E McMenamin Ms J Morrice
Mr J Wells

Apologies: Mr P Doherty MP (Chairperson)

In attendance: Mrs C White (Committee Clerk)
Mr M Anderson (Assistant Committee Clerk)
Mr R Anderson (Clerical Supervisor) Mrs J Murdoch (Clerical Supervisor)
Miss A Fowler (Clerical Officer)

In attendance for the public evidence session at 11.10am: Mr J McCusker, Mr T Gillen.

In attendance for the public evidence session at 11.50am: Mr W Mayne, Mr G Shannon, Ms G Briggs.

6.1. Representatives from the Irish Congress of Trade Unions gave evidence to the Committee on Industrial De-rating and answered questions raised by Members.

6.1.1. Representatives from the Ulster Farmers Union gave evidence to the Committee on Industrial De-rating and answered questions raised by Members.

Present: Mr S Neeson (Deputy Chairperson)
Mr B Armstrong
Mr W Clyde
Dr A McDonnell
Ms J Morrice
Dr D O’Hagan
Mr J Wells

Apologies: Mrs A Courtney
Mr P Doherty MP (Chairperson) Mr D McClarty
Mr E McMenamin

In attendance: Mr M Rickard (Committee Clerk)
Mr M Anderson (Assistant Committee Clerk)
Mrs J Murdoch (Clerical Supervisor)
Miss A Fowler (Clerical Officer)

In attendance for the public evidence session at 10.42am: Mr J Simpson

Mr J Simpson gave evidence to the Committee on Industrial De-rating and answered questions raised by Members.

MR SEÁN NEESON MLA
Deputy Chairperson

Wednesday 30 January 2002

Members present:
Mr P Doherty (Chairperson)
Mr Armstrong
Mr Clyde
Mrs Courtney
Mr McClarty
Dr McDonnell
Dr O’Hagan
Mr Wells

Witnesses:
Mr D Dobbin )
Mr M Ennis ) Confederation of British Industry
Dr I McMorris )
Mr N Smyth )

1.

The Chairperson: Good morning and welcome to the Committee for Enterprise, Trade and Investment. Our findings on the effect of derating on industry may be shared with the Committee for Finance and Personnel because our remits overlap. We will hear your submission and then ask some questions.

2.

Dr McMorris: Thank you for your invitation to give evidence. I will introduce our delegation. Mr Mark Ennis is the chief executive of Boxmore International plc, which is involved in the packaging industry. Mr David Dobbin is the chief executive of United Dairies, the parent company of Dromona Foods, which is involved in the food and agribusiness industry. Mr Nigel Smyth is the full-time director of the Confederation of British Industry (CBI) Northern Ireland. I am Ian McMorris of Ulster Weavers, which is in the textile industry. We represent a reasonable cross-section of the manufacturing industry.

3.

I will give a general introduction and Mr Smyth will talk you through some PowerPoint slides. We will then take questions.

4.

We first became aware of the rating review in the middle of 2001 and our members quickly raised their concerns about the implications of the review. There is already a high cost base to operating in Northern Ireland and we would like to draw the Committee’s attention to the high energy costs. We will give some examples of the impact that that has had on our members. We also have additional transport, water and waste costs over and above the rest of the UK because of the relative remoteness of our markets. Northern Ireland used to be a low-cost employment area in the UK, but that is no longer the case. Employment is not readily available in many areas in Northern Ireland.

5.

Invest Northern Ireland must find incoming projects in, for example, the new technologies and it must deal with the problem of incoming investment. Multinational plants here face competition in bidding for new projects and products from their parent organisations. These large organisations may be American or based in other parts of the world, and when their reviews are carried out they take the cost base and the profitability of operating in various countries into consideration. In some of these cases Northern Ireland has lost out because of factors such as the cost of energy. We are concerned about the additional operational costs here and see industrial derating as partly offsetting those.

6.

In October we responded to the Committee by way of a paper, which you may have already perused, and I will now invite Mr Smyth to summarise the key issues that that paper addressed.

7.

Mr Smyth: I have circulated a short slide presentation and will run through it quickly, drawing out the key points from our October briefing paper.

8.

I will cover the question: does manufacturing matter? I will then discuss the current and future economic climate and go on to examine the rationale for derating the industrial manufacturing sector. Consideration will follow of the advantages the industry enjoyed in the past, which are now declining. I will then make some concluding remarks.

9.

First, does manufacturing matter? It is fairly well known that in Northern Ireland 100,000 people are directly employed in manufacturing. The number peaked in the mid-1990s at around 107,000, but has recently fallen below 100,000. Manufacturing is a key sector for wealth creation. It is less well known that a significant element of the service sector depends entirely on the manufacturing sector. Services such as logistics, transport, cleaning, catering, and security relate directly to manufacturing. A wide range of services such as legal, financial and consultancy services also depend on the manufacturing base. However, in many sectors there are highly paid employees, which gives significant spending power in the Northern Ireland economy and underpins a broad range of jobs. We would estimate that around 40% of the private sector depends on a vibrant manufacturing sector.

10.

That is important in providing a choice for the nature of work and career paths for people who want to go into engineering, processing or even research and development. It is also part of a balanced economy. None of our members believe that we should focus on one particular sector, whether it be services or particular aspects of manufacturing. We need a balanced economy to be able to share the risks and not become overdependent on any one sector. We also recognise that there is a transition to a more knowledge-based added-value economy. The economic climate is tough, and globalisation trends will continue. The key issue is the intensification of competition that is impacting on large and small companies. With the introduction of the euro, there is also a greater price transparency across Europe in the markets that Northern Ireland companies are competing for and investing in.

11.

The manufacturing sector, in particular, has been exposed to the high strength of sterling — now into its fourth year — which in turn is having a significant impact on margins and profitability. More recently, many of our international markets have weakened and companies have to respond to that. With margins and profitability reducing, investment returns are becoming depressed. Indeed, investment intentions at present are running weak, not just in Northern Ireland but across the UK.

12.

We are also in a position where Northern Ireland’s cost base has become increasingly high — I will return to that point. Northern Ireland is losing its competitiveness in a number of areas. There is currently a great deal of global uncertainty. The rating review and its impact over the next four to five years has created uncertainty in the manufacturing sector for many companies that want to invest. It would be helpful to clear up where we are going on this.

13.

We believe that the rationale for derating remains, and we have highlighted examples in our paper where Northern Ireland has become an increasingly high cost base. The Chairperson has referred to high energy costs, and Northern Ireland has the highest energy costs in the EU, despite what many people may have read in the ‘Belfast Telegraph’ last night. We have bigger risks which are caused by swings and movements in electricity prices in Northern Ireland. In January 2001 our prices may have been marginally below those of some European countries, but most manufacturing companies suffered price increases of between 15% and 28% last April, which is difficult to plan for. Costs are expected to come down this year, but we are at the top end of the spectrum if we compare costs to GB, the Republic and most of Europe. We look forward to the Committee’s deliberations and report on energy, which it has been investigating over the past few months.

14.

High transport costs have a significant impact. It is costly to bring in raw materials from GB, and also to get our products to markets. We also have higher costs for servicing technical machinery, requiring people to fly in to do those jobs. We have also provided evidence of higher insurance costs — a tradition in Northern Ireland — which impacts across the manufacturing sector.

15.

We have produced the latest water costs figures from 1997. Water costs in Northern Ireland have continued to rise since then, and a major review in 1999 by the regulator in GB has shown an average price reduction of 12%. Northern Ireland water costs are probably the highest.

16.

The final area I wish to discuss is that of waste management costs. By that I do not simply mean waste disposal costs. In the past 12 months our attention has been brought to the fact that we have some of the most expensive waste disposal sites in the United Kingdom. We also have limited facilities for recycling, because we are a small region, with the result that many companies have to export waste to Great Britain, thus incurring additional costs. There are, therefore, significantly higher costs in a range of areas.

17.

Let us examine some of the advantages we have enjoyed. Over the past five to six years we have seen significant and fundamental changes in the labour market. Higher employment has been welcomed, and that has also been reflected in significantly lower unemployment statistics. However, companies have found it much more difficult to recruit and retain staff, and staff turnover has increased. Companies have higher training costs, because the early 1990s pool of skilled labour is no longer there. We have evidence that pay differentials with GB have declined. With the economic growth of recent years, driven mostly by the larger Northern Ireland companies, we have closed the pay gap. We have argued that Northern Ireland does not want to be seen as a low-pay, low-wage economy.

18.

We also have the additional costs of attracting professional and technical staff to Northern Ireland. We have an image problem; we are a small part of the economy, and many companies — for example, pharmaceutical and technology companies and those in the food sector — pay a premium to attract staff.

19.

There are two other areas in which we enjoyed an advantage. The gap in property costs has been closing over the past five to six years. We also have an increasing tax burden in Northern Ireland compared with our international competitors. I can point to things such as the climate change levy and the aggregates tax, which will soon be introduced, although a strong lobby is attempting to secure a one-year derogation for various products.

20.

We have a high cost base. We see rating charges as another tax and believe that they must be assessed for their impact on competitiveness. Companies seek predictability in their future bills, and they need plenty of time to plan for any changes that may be introduced. We believe that any additional costs and taxes will undermine Northern Ireland’s current competitiveness. That means lower profits and returns, which in turn will mean lower investment. The bottom line is that it will lead to a reduction in employment through loss of potential inward investment and existing jobs.

21.

We believe the rationale for derating will weaken after 2010, largely because of the unwinding of the electricity contracts. However, we also stress that the existing high cost base in Northern Ireland must be reduced. We want Northern Ireland to be an attractive economic environment for indigenous companies, start-ups and international investment. In our competitive situation we are concerned about the Republic of Ireland’s tax regime. One of our members said that we must be careful about any changes in this arena, because any change to the existing regime is likely to have unforeseen and harmful consequences.

22.

Dr McMorris: I will ask Mr Ennis and Mr Dobbin to make some comments.

23.

Mr Ennis: I would like to speak in multinational terms. I am a senior vice-president in an American corporation which bought over Boxmore a year or two ago. We have over 50 operations, primarily in Europe. In investment decisions we examine closely the cost base of competing companies in our operations. Quite often, some of them will compete in similar marketplaces. As Mr Smyth has highlighted, rates are a tax by another name and they increase a company’s cost base. When the issue is examined in simple terms, it can be seen that it affects inward investors in two ways, influencing where they would set up additional businesses and in which existing businesses they would continue to invest.

24.

We have recently decided to install increased capacity in the South because of the high Northern Ireland cost base. That has happened despite whatever loyalties I might have to fly the Northern Ireland flag within our remit in the American head office. Let us look at the practical cost figures. If we do not recognise that we have a highly uncompetitive cost base, the danger is that we could add to it, and that will costs jobs for Northern Ireland, which will mostly go to either Great Britain or the Republic. The relative cost base in those two areas in particular must be examined.

25.

As Mr Smyth has indicated, if Northern Ireland electricity charges were brought down to a competitive remit with Great Britain by 2010, we could then say that the time is right to have rates reconsidered and brought into the picture. However, it would be detrimental to Northern Ireland as things stand.

26.

Mr Dobbin: I would like to address the more specific concerns of the food industry, which is still one of the largest parts of the manufacturing sector despite the problems in the Province in the past year. Our business is run as a co-operative. It is owned by local farmers, it employs local people and is committed to the local economy. Our ethos is to try to develop our business on a local base where possible.

27.

In order to survive, however, we have to export outside the EU. We also have to sell products into the home market, in which we are competing mainly against Southern Irish companies in Ireland and England, because Southern Ireland has a number of food manufacturers. In export markets we are competing against Southern Ireland, New Zealand and America. In both home markets and export markets we suffer considerable disadvantages, which are currently being hammered home because this year the dairy sector alone will lose approximately £100 million of income as a result of EU changes to take out export subsidies.

28.

At present our Southern counterparts have a corporation tax of 10%. Energy costs less in Southern Ireland and Great Britain. Energy in Northern Ireland is 25% more expensive than Great Britain, and significantly more expensive than New Zealand and the United States. It is our second highest cost.

29.

We also have problems getting products to market because of the poor transport infrastructure and fuel costs. Everyone in Northern Ireland is aware of high fuel costs in the United Kingdom. On their own, those costs might be surmountable, but collectively, when coupled with a strong sterling, we are literally fighting for our lives in export markets. Imported products from Southern Ireland and New Zealand are beginning to take more of the share of the shopping basket in the home market as world trade talks and agreements pull down the barriers to imports.

30.

We employ 1,000 people directly; we provide full-time employment for approximately 5,000 people on farms; and a further 1,000 people are employed as milk roundsmen and in animal feeds and other packaging trades. Altogether we give direct and indirect employment to 7,000 people. At this stage we are struggling to maintain those jobs.

31.

We are contemplating an investment in a new factory for added-value products to try to improve what we can offer to the customer. That factory might be located in the west of Scotland, Monaghan or north Antrim. At this stage the cost per annum to locate it in Northern Ireland is somewhere around £0·5 million more than it would cost to locate it in Southern Ireland or the west of Scotland. Both countries are offering grants that are similar or better than Invest Northern Ireland; both areas are offering lower energy costs; both areas have lower transport costs; and both areas now have a wage bill similar to our own. In fact, the wage bill in the west of Scotland is lower than that in Northern Ireland.

32.

We are a co-operative, owned by local people, managed by local people and committed to the local economy. However, we are caught between two options. Do we survive in the market and move production out of Northern Ireland, or do we continue to be faithful to the local economy and manage the decline? In the long term, if we put extra rating into the industrial base in an abrupt manner, or in a manner that does not address other structural issues, there will definitely be a cost to jobs. In the current world economy climate, the required inward investment is not there to replace them as it might have been two or three years ago.

33.

Dr McMorris: In conclusion, it would be wrong of me not to mention the textile industry. I was a member of a Northern Ireland Textiles and Apparel Association delegation that met the Committee around 18 months ago. Many issues in the food industry mentioned by Mr Dobbin also apply to the textile industry, which still employs more than 16,000 people in Northern Ireland. Many of those jobs are in areas where there is relatively less employment or where employment is more difficult.

34.

In many cases the textile industry is struggling to survive and many companies are going through the transformations that are necessary to try to compete in the modern world. They do not need another bill falling on their doorsteps, because in many companies that will be the straw that breaks the camel’s back. Some business will not survive in any case, but the industry is still substantial and it does not need another burden. I will now hand over for questions, and I hope that we have not been overly negative and depressing.

35.

Mrs Courtney: I welcome your presentation. As someone from west of the Bann — in other words, beyond Glenshane — I can confirm that, as a consequence of the troubles, everything you have said about energy is quite right. We cannot be competitive because currently there is only one energy source. With regard to transportation, the roads into Derry are some of the worst in the North. Derry is in a border area and the euro has caught up with us already, even if it has not caught up elsewhere. I remain convinced that derating at this stage would be detrimental to the whole economy.

36.

You stated that insurance costs are increasing. During the troubles, insurance was extremely high and I have recently discovered that it is difficult to insure a politician’s office. Has the peace process helped you with insurance? If not, will it happen? The Confederation of British Industry made some positive statements at the time of the peace process and has been supportive of it. When it comes to insurance and the day-to-day running of businesses, has the peace process helped you in any practical way?

37.

Mr Dobbin: I would like to answer that question because we have just renewed our group insurance. We have four manufacturing locations and 16 distribution depots in Northern Ireland, and our policy has risen by just under 60% this year. The total extra premium has increased by £300,000 to £400,000. I forgot to put that on my list of woes earlier — thank you for reminding me.

38.

The insurers cited the events of 11 September as the reason, and they have taken a different view of consequential loss disaster. In Northern Ireland terms there is a loading, because of the risks of terrorism, and we probably rate slightly higher than the average European country. This is the situation we are facing and we hope that it will diminish in time. Insurers have had a bad shock as a consequence of 11 September. In my own case, the guesstimate for the rates bill is somewhere around £500,000. Taken together with increased insurance premiums, that is £800,000 in extra costs.

39.

Last year our group made a profit of just over £2 million, and this year our energy costs have also risen. When the figures are added up, we will probably not make a profit this year, and that was before the full effects of 11 September hit us. Insurance problems will apply to the wider world scene, and the effect of the insurance premiums will be felt across the spectrum in GB and Southern Ireland.

40.

Mr Smyth: Premiums for buildings insurance and business disruption insurance have gone up by significant amounts. That is happening across the UK and Europe. Employers’ liability insurance has always been higher in Northern Ireland. There is a higher rate of claims here, despite accident figures being lower. That rebounds on the companies that have to pay for it.

41.

Mrs Courtney: As a direct result of the events of 11 September, the St Angelo airport in Fermanagh closed, because the premiums went up so much. The premiums for the airport in Derry shot up by about £75,000.

42.

Mr Wells: I wish to play devil’s advocate. The Assembly has a very small rate base to draw upon to provide services. There are only 600,000 households, many of which are in TSN areas and qualify for rates rebates. We have no other form of fiscal independence; we cannot increase VAT or income tax. Therefore, the only way to bridge the gap between what we spend and what the Exchequer in London provides is rates.

43.

I have been involved in derating; it was one of the few achievements of the old Assembly in the early 1980s. I remember that in December 1983 we danced out of this Building, having won that concession. However, industrial derating deprives the economy of £100 million per year, which could be put into services such as healthcare or education. Why should our industry not pay its debt, when its competitors in the rest of the UK do so?

44.

Dr McMorris: The costs of operating here are now higher compared to those of our competitors in the rest of the UK or in the South. We pay a premium on energy, amongst other things. We can give the Committee facts and figures about that. We could pay industrial rates, but we are convinced that it would have a direct impact on employment. That choice must be made. We understand the Assembly’s problem. Perhaps, in some areas, the domestic consumer is underpaying in comparison to their counterparts elsewhere, even taking into account the large number of households in TSN areas.

45.

If and when we manage to unlock energy price, there would be much less of an argument for derating, provided that other things remain in line.

46.

Mr Wells: You are assuming that, if you did pay rates, it would be entirely negative. What if the £100 million was hypothecated to provide better roads or transport, which would directly benefit industry? For example, Mrs Courtney mentioned the problem with roads west of the Bann.

47.

The Minister of Finance and Personnel, Dr Farren, may accept your point, but say that the £100 million would be dedicated to benefiting industry. That may involve robbing Peter to pay Paul, because it would free up £100 million that could go into health or another service. Can it not be seen as an investment decision, rather than a tax?

48.

Mr Dobbin: You talk as though industry, and the employment that it generates, does not pay high taxes already. We already pay considerable corporation tax, despite the lower level of profitability of Northern Ireland companies. The private sector generates about £500 million in corporation tax for the Exchequer. All our employees pay income tax. We pay national insurance; we pay tax on fuel at a higher rate than anywhere else in Europe and we pay more for vehicle licensing than anywhere else in Europe.

49.

As a business, we are already facing one of the highest tax burdens in Europe. Many years ago, Southern Ireland took the bold step of reducing the level of corporation tax for manufacturing businesses to 10%. On face value, that reduced the income that the Government received from businesses. However, even despite its recent problems, the Southern Irish economy has seen a vast increase in the amount of money that businesses contribute to the Exchequer by creating an environment where businesses could prosper and employ more people who, in turn, pay tax.

50.

All our employees pay income tax and rates on their homes. Every business pays National Insurance. We are already contributing. We have given our pound of flesh through excise duties on roads. We should be getting value for money on what we have already paid. You cannot take too much of the cake from one area. The economic cake must be made bigger. That will give the Government more money to put into infrastructure. We are also citizens — I want better hospitals, better schools and better roads. My children have educational needs. My parents are old age pensioners who must pay for healthcare and homes. We have the same needs, but if too much is taken from industry, the cake will get smaller until eventually there is nothing left.

51.

Mr Smyth: We are extremely concerned about the infrastructure deficit. The view from business is that current spending and the efficiencies and effectiveness of public expenditure must first be put in order. I will give some examples. The Minister suggested that around £30 million per year could be saved through better procurement practices alone. Absenteeism in the public sector in Northern Ireland has been quoted in the Assembly at 6%. That is a cost of £145 million a year, if it applies to the entire public sector. What are we doing to save some of that money? Savings could be made on benchmarking and the use of e-commerce, and also through cutting excessive administration and management costs. Management costs in the Health Service are about 1% more than in Scotland. That is about £15 million per year.

52.

There is a range of other areas where savings could be made to give additional investment to education, transport and health, for example. We should also be innovative in looking at underutilised resources in the public sector such as land and property to see where funds can be raised. That money could then be spent on areas that are of more benefit to business and the wider community in Northern Ireland.

53.

Mr Ennis: I appreciate that Mr Wells is playing devil’s advocate in teasing out some of the issues. Industry is quite a soft target in this situation. As Mr Smyth said, there are certainly plenty of savings to be made in the public sector that could contribute over £100 million to health or education. It is important to get that in order first. Business generates wealth and jobs in the community. It would be very short-sighted to take the easy way out and hit the business sector.

54.

I do not know whether the Committee is aware of a document has just been published by the Milford Group, an independent group of businessmen, which suggests a very effective way of operating in the UK tax system that gives a competitive rate with either the Republic or GB. If tax revenue was increased by a rate increase, adopting the Milford Group’s suggestion could offset that, and yet still give a balanced view. Whatever it is called, tax is about getting the balance right and not increasing the cost basis any further.

55.

Mr Wells: Taking off my devil’s advocate hat, my concern is that the £100 million would simply be deducted from the block grant anyway — there would be no additional money. That has always been the problem with EC funding. For example, if £400 million were given to agriculture, that figure would be deducted from what agriculture was originally going to receive anyway.

56.

High electricity prices stem from the generation contracts that were signed at the time of privatisation. If that problem was cracked, and prices were brought down to the UK average, are you saying that you would be prepared to accept the rates burden?

57.

Dr McMorris: Our argument for continuing derating is much weaker at that point. Providing that other factors have not increased the cost base in the meantime, we would be happier to accept rerating, because industry has always seen that as the trade off, even when talking to Government.

58.

Mr Armstrong: I agree with what you have said, because Northern Ireland is an exporting country. In a stable situation, insurance companies will not charge as much, and the outside world will see that we have a more productive environment. How can we get those costs down?

59.

Mr Ennis: That is a good question. One way to bring insurance costs down is to introduce a different legal system for processing insurance claims. The jury system and employers’ liability insurance, which Mr Smyth referred to, are the reasons that those costs have not come down. Mrs Courtney made a good point. Why, when political stability has significantly increased in Northern Ireland, have insurance rates not reflected that? The way in which claims are processed through the courts system is the crux of the matter. The biggest fundamental change that the Assembly could make is to adopt the system used in Great Britain. A significant reduction in insurance costs would then be seen.

60.

Mr Armstrong: None of your businesses are facing the same risks as they did over the past 30 years, so there should not be a high risk. Northern Ireland does not compare with the United States, 11 September notwithstanding. That event should be reflected here. It was the terrorist activity that left us with high insurance, whether it was vehicles or property.

61.

Dr McMorris: The major area of non-competitiveness on which we are concentrating, and where we are out of line with our competitors in the rest of the United Kingdom, the Republic and Europe, is in relation to employers’ liability insurance. It is a major cost. The cost of insuring for that, and the cost of reacting to claims for that, is where we are out of line. It is to do with the level of awards and the way in which they are processed through the system. Is that correct, Mr Smyth?

62.

Mr Smyth: Yes, it is. We do not want to be a low-wage economy, but there are many additional costs as well as wages. Northern Ireland has proportionately many more claims as a result of industrial tribunals than Great Britain. We have additional administration costs due to legislation. Companies must have people on board to manage those costs.

63.

I always understood that terrorist insurance was covered by the Compensation Agency, so that would not have any impact. The situation since 11 September applies to companies across Europe and the United States. We are on a level playing field in that respect. We were trying to draw attention to where Northern Ireland is particularly disadvantaged in that instance.

64.

On the issue of competitiveness, there are problems with water costs and waste disposal costs. The policies and decisions made by the Executive have an impact on who will be charged what, what efficiencies are to be effected and who is driving the costs out of the system. In Great Britain, water and waste are now regulated industries, there have been major efficiency savings. Major investment was undertaken in the 1990s, which Northern Ireland has yet to face. It is worrying that there is not enough pressure on the organisations to drive costs out.

65.

Mr Dobbin: Any elected representative will be concerned that driving the cost out of the public sector is a two-edged sword, because it provides much-needed employment. To be positive, there is a lot of talent in the public sector. There are many people with skills, knowledge and capabilities that are not available to the private sector. If we made our public sector more efficient, ultimately the redeployment of those people in the private sector would create wealth for everyone. It is a case of trying to find a way to do that with the least disruption. For instance, if rates had to be introduced, one would hope that they would not be introduced at 100% on day one. There is scope in our economy to try to get more wealth creation so that that money, to take Mr Wells’s point, can come back through income tax and normal tax methods into the Assembly or central Government for redeployment into social services or other requirements.

66.

Mr Wells: Our difficulty is that rate money comes directly into our Exchequer and into our pot of money. Any increase in Inland Revenue is snaffled up by the Chancellor, who takes it with great delight, and then we have to battle for it.

67.

Mr Dobbin: I understand that you have the powers to put a levy of income tax on top.

68.

Mr Wells: The Scottish Parliament has those powers, but unfortunately the Northern Ireland Assembly does not.

69.

Mr Dobbin: If you had those powers, how would you feel about going to your electorate and saying that you want to increase the tax burden on them? You would probably be lynched, and you would not do it. However, you are happy to do it by stealth, or what could be considered by stealth on businesses.

70.

Mr Wells: There is so little industrial investment in south Down that I would have no worries, but there would be big problems for other folk here such as Mrs Courtney.

71.

Mr Dobbin: We have factories in Cookstown, Keady, Ballymena and Cullybackey. There is no industrial conurbation in Cullybackey or in Keady, so we are one of the few local employers in those areas. If rates were introduced, we would close the smaller factories and consolidate because it would become too expensive to have a multisited operation in Northern Ireland.

72.

Rates will punish those outlying areas west of the Bann and north of Lough Neagh more than in Belfast. Those companies which export will be punished much more than those companies which are home-market-related because everyone in the home market will be paying the same rates. However, if one exports one has to compare the total tax burden with low cost areas in America, the Midwest, New Zealand or South America.

73.

Mr Armstrong: Are you saying that rates should not be as high because Northern Ireland is an exporting country instead of an importing country?

74.

Mr Dobbin: The total tax burden on our companies must be realistic and our total cost burden must be competitive with the people we have to beat, or match, in the market. If it is not competitive, we will not make the decision on whether we invest here or survive; it will be our customers who will walk away from us.

75.

Dr McMorris: We need to remember that this is a country with a population of 1·8 million, and it is a small market. The vast majority of companies that manufacture in Northern Ireland have to survive by exporting, even if it is to the rest of the United Kingdom, which is still across a stretch of water. In each of those cases we are competing against companies which are more local to the market. The sterling is very high in Europe, and life is very tough. In GB there is deflation on an output basis. The multiples that I sell to do not expect to pay what they paid last year — they want to pay less. Likewise there is generally a downward pressure on prices with Mr Dobbin’s food products. This is the background against which our companies are working, so the export situation is even more important.

76.

Mr Armstrong: I agree that we must be competitive, and to be competitive we are fighting against high sterling and the euro. Our Government have to support us in some way. There is no point in strangling people who are trying to make the country a more profitable and better place in which to live.

77.

Mr Smyth: I read in a Bank of Ireland briefing that currently one in four companies in Northern Ireland is unprofitable. If more costs are added, companies are made even more unprofitable and in many cases completely unviable, so more companies will just disappear.

78.

Dr McDonnell: I am intrigued by Mr Smyth’s second last point. The rationale for derating post-2010 is that energy charges at that stage are perceived to change.

79.

I understand that industrial energy is bought on the open market. When we spoke to the great and the good, we were told that at the upper end of the energy market, 35% was deregulated for the most frequent users, and the majority of industrial users fall into that bracket.

80.

Mr Dobbin: The bulk supply tariff (BST) that is part of the supply to large users is the same that is sold to consumers. Yesterday I renewed our electricity contracts, and prices have fallen this year because of the Moyle interconnector and a slight increase in the North/South interconnectors. However, when Southern Ireland and Scotland sell into Northern Ireland, they still do so at a higher rate because they know that there is not enough competition — our home generators that can more than cover our needs have locked us into those higher prices. The prices have come down for the large users who use between 6% and 10% of the electricity. Last year, prices rose by 17%, and at present overall electricity in Northern Ireland is about 25% more expensive than that sold by the equivalent UK company. I do not have the figures for Southern Ireland, but our electricity is a lot more expensive than theirs, and theirs is more expensive than in GB.

81.

Dr McDonnell: That is important because for the past year the Committee has been trying to get to grips with the energy issue. The Committee will finalise its views today or tomorrow when every "i" is dotted and every "t" is crossed. The point you made on prices had not been made clear, because I understood that it was a free market. I had a conversation the other day with Harry McCracken from Northern Ireland Electricity (NIE) and he is keen for the market to open up. I am aware of the Moyle interconnector, and I am also aware that there is an artificial floatage on the market. The Committee is keen to correspond with you about energy because it needs to know more, and I would be glad to do that, either privately or with the Chairperson’s permission. Energy cross-cuts industry, and it must be dealt with because everybody is being bled dry.

82.

Dr McMorris: Could we deal with Dr McDonnell’s question in more detail? We have one or two things to say that are significant.

83.

Dr McDonnell: I would like some more detail from you.

84.

Dr McMorris: We will do that, but we can give you some specifics.

85.

Mr Smyth: From next year, most of the power that goes into the eligible market — that is the top 300 companies — will come from Scottish Power, so there will be no other competitors. There were newspaper reports this week that neither Belfast West Power Station nor Premier Power Ltd in Larne will compete. That means that there will be a reduction in prices of 6% to 10%. However, power prices in Northern Ireland will still be significantly higher than anywhere else in GB. There are two reasons for that: first, the cost of bringing power over the interconnector will be high, and secondly, there is no other competition in Northern Ireland. There is no other efficient generation. The power that goes to Premier Power Ltd through into BST will be about 23% higher than after 2012. There will be a lot of cost depreciation in the contract for that period, and after that it will no longer go out to contract. There will be significant downward pressure on energy prices in about 2010 or 2012.

86.

Mr Ennis: I have two operations, one in England and one in Northern Ireland. The Lurgan operation went out for tender on the competitive market. Two companies gave us quotes, NIE and the Electricity Supply Board (ESB), neither of which could serve us adequately. The ESB could not give us enough energy to meet our needs, so NIE was our only supplier. We will have a 6% reduction when Scottish Power comes in. However, our energy costs rose by 20%. Twenty-three companies quoted for the Crewe operation. When Lurgan’s bill rose by 20%, Crewe’s bill went down by 5%. If I moved the Lurgan operation and based it in Crewe, it would save £500,000 a year.

87.

Dr McMorris: One of the Blue Circle sister companies that is based in Cookstown can buy power at 2·9p in Scotland, but they pay over 4p here.

88.

Mr Dobbin: I can give you another reason why our costs are dearer. In the presentations that we received five companies quoted for electricity supply — Scottish Power, the ESB, NIE and two other smaller companies. Only Scottish power companies service the Moyle interconnector. It has been set up in such a way that other English regional electricity companies are not allowed to supply power into it, even though they supply power to the grid. The result is a Moyle monopoly by one or two companies in Scotland. If that was broken, there could be cheap electricity through the Moyle interconnector.

89.

There is a Southern connector that is not fully utilised, and 240 megawatts of power generation in Ballylumford that has been switched off by British Gas because it claims it cannot obtain economic gas. The same company is supplying economic gas directly into electricity generators in the UK. Something must be done to investigate why 240 megawatts cannot be used at Ballylumford, and why the Moyle interconnector has no competition.

90.

Progress has been made, and money can be saved. Those involved should be congratulated. If we had low energy costs, Jim Wells and others would then be able to say rightly that costs had been improved. I am being deliberately facetious, but we would have less defence. What we are looking for is a total cost package that is competitive. It is not, to some extent, irrelevant where the money goes, but that is not as important as the total cost.

91.

Dr McDonnell: I appreciate what you are saying in relation to energy costs. The Committee can work on that. The Assembly is business-friendly and is keen to see industry succeed. There is no point in reinventing businesses or allowing existing businesses to stagger or fall. The Assembly realises that but it has a dilemma. Every year, when efforts are made to expand the block grant for Northern Ireland by a few million pounds, the UK Exchequer says that our rates are too low and that the Assembly is, therefore, not collecting enough money either at domestic or industrial level. It does not see why it should give Northern Ireland money for roads and so forth if the Assembly does not collect it. Against that backdrop the pressure is on. Members are sympathetic to your case, not only at industrial level but also at the level of small businesses that lobbied against rates going up last year.

92.

Nothing much can be done about insurance. However, something can be done about waste disposal. In relation to that the Committee was impressed during a recent visit to Denmark where many businesses and industries, like those that I presume you represent, operated combined heat and power plants. They were able to produce 90% energy from waste, which became either hot water or electricity. There is little of that in Northern Ireland. There is terrible waste regarding electricity consumption here. In some cases there is only a 30% recovery of energy.

93.

Is there an opportunity to examine waste disposal? There will not be much recycling until some of the bigger industries that you represent take it by the scruff of the neck and start experimenting by setting up small company-based incinerators that will take care of waste disposal and produce hot water and electricity. The Committee was impressed with what it saw in Denmark, because some of those generators were supplying 200 homes. They were small, compact and efficient — as efficient as anything possible.

94.

Mr Smyth: The Department of Economic Development carried out many studies in the mid-1990s. A key issue then was the lack of natural gas, which is an attractive fuel for combined heat and power. Now that we have natural gas, there is potential. There are new plans regarding waste and drafts will be published next week.

95.

There is some uncertainty about waste. There are concerns regarding how the Department of the Environment has been developing its waste policies. There must be competition and a drive in all those areas with regard to cutting down costs. Going to one site will create a monopoly. Dargan Road is one of the most expensive monopolies in the United Kingdom and other sites are not being given the opportunity to compete. It is to be hoped that over the next six to nine months there will be more clarity with regard to waste strategy for Northern Ireland. At our council meeting last week a member who is involved in the environment said that key players, both indigenous and outside Northern Ireland, are examining facilities for recycling and waste management in Northern Ireland. I hope that in the next year or two there will be some movement in that area.

96.

Mr Wells: I accept that everything you say is correct, and I am glad to have played devil’s advocate because you brought out points over and above those contained in your presentation. This is a difficult circle to square, and our colleagues on the Finance and Personnel Committee are looking for new ways. Your strongest argument is that if the energy situation were sorted out, you would be prepared to look at rating again. That is a reasonable stance. You do not ask for favourable treatment, only for a playing field equal to that of your customers and rivals in the rest of the UK and in Europe. Were that situation to arise, would you look for a gradual introduction, say phased over a 10-year period?

97.

Dr McMorris: If we have level playing fields on energy, our argument for maintaining total derating is removed, or certainly weakened. We would then suggest that were it to be introduced it should be phased in. Companies can adjust to things, given time. To go from nothing in one year to 100% in the next would not be desirable.

98.

Other areas of uncompetitiveness must also be addressed. Dr McDonnell talked about waste disposal, and that area is an increasing problem for some companies. It may well be that we should pioneer recycling schemes.

99.

In general, the answer is yes, but with qualifications.

100.

Mr Smyth: Paragraph 18 of our paper highlights the fact that companies look for predictability. They would be very upset if, having recently invested, the Committee decided to introduce rates next year. An indication must be given that rates will be introduced after, say, four years. Companies will then make their own decisions as to whether Northern Ireland is an attractive investment environment. Companies must be given predictability and plenty of time to plan ahead.

101.

At UK level, we are concerned about the impact of the climate change levy. Its real impact will only be seen five years down the line, and many decisions will not be made until then. Companies will not have reinvested and will move their operations. We must think the matter through very carefully.

102.

Mr Ennis: With regard to Dr McDonnell’s point about Treasury turnaround and rates, our obvious response would be that had the generating contracts not been made in the first place, there would not be a high cost base. We would not ask for derating, because our energy cost would be competitive. From an industrial standpoint, all we ask for is a level playing field. The Treasury created the unfair playing field, and were they to address that, we would be happy.

103.

Dr McDonnell: We agree without reservation.

104.

Mr Dobbin: Mark Ennis made a suggestion about the Milford Group. Were the Department to introduce rating but at the same time give us a lower tax burden elsewhere which would affect the cost while giving the Department the spending freedom it wanted, we would have no problem "swapping" the tax burden. For exporters, for instance, if there were relief on marketing costs or on product development costs as we ask, rates would make us no worse off. If I understand it correctly, what drives the Committee is that to some extent the rate money causes particular problems with the flow of funds to the Assembly. If that is so, the Committee could help us by changing the shape of the rate burden and keeping it neutral in respect of overall cost, thereby solving the problem of money perhaps going elsewhere in the Exchequer. We would have less concern and we could do it immediately. It is about trying to see if we can keep or cap the overall burden for companies. For example, if the Milford Group’s requirements were met, that would reduce the tax burden, particularly for exporting companies.

105.

Dr McMorris: More discussion on this would be required. One of the immediate things that comes to my mind is that the Milford Group’s proposals circulate around tax credits. If there are companies that are not making much profit — and my particular sector has that problem — if the figures are examined, they cannot get the benefits. There are companies that are struggling to survive and are teetering on the edge; this could add to their problems. Typically textile companies have big premises. That is something that I would be concerned about. This is not something that we have totally rehearsed. It is something on which we would be prepared to join in discussion.

106.

Mr Wells: I have a word of caution about the line that you are going down. There are companies in Kilkeel, such as the glassworks, which have vast expenditure on electricity. A reduction in electricity costs would have far more beneficial impact on those companies than any decision on rating. Are there companies that are low electricity users that would get clobbered by rating and not see the consequential benefit through lower electricity costs? You all seem to be representing industries with high-energy input.

107.

Dr McMorris: The textile industry probably does not have the highest energy input, so we would be broadly neutral. It is a valid point. As a whole, we are saying that our argument is somewhat weakened, but it will affect companies differently.

108.

Mr Armstrong: My understanding is that you are saying that you are quite willing to pay extra rates provided that the benefit comes to Northern Ireland and that you are not disadvantaged with the expenditure that goes elsewhere? The money that you pay for high electricity and insurance bills seems to go out of Northern Ireland, and therefore it is not going into the Northern Ireland economy. You will pay higher rates if you are still able to make a profit and be on a level playing field.

109.

Dr McMorris: It is all about us being competitive and getting the level playing field. It is about our relative competitiveness; that is the message that we want to leave with the Committee. We must have competitiveness for our companies if we are going to develop employment and grow. If we are not competitive as a location, we will not get the inward investment, and we will not win the investment decisions. You have heard of two today — one that has definitely gone against us and one that has the potential to go against us as a Province. That is the crux of the matter. If energy costs were to come down, that would be one of the major areas of non-competitiveness removed.

110.

Mr Clyde: You mentioned aggregates tax. How damaging would the aggregates tax be to industry in Northern Ireland?

111.

Mr Smyth: That issue focuses on the 1,800 people involved in the aggregates industry. We can forward a short briefing to the Committee if members are interested. It has impacted particularly on the border areas and on companies from the border areas involved in added-value products. In the pre-Budget report in November, Committee members will be aware that we have had a one-year derogation on aggregates tax. One year is insufficient; indeed, a five-year phasing is insufficient. We would like to see it brought in over 10 years or wait until the Republic of Ireland does so. Consultants in the Republic of Ireland have recommended aggregates tax, although the Government are currently not minded to introduce it.

112.

It would add cost to public expenditure. I saw some figures that indicate that in relation to new road building, hospitals and the use of aggregates, it will add about £10 million. That will be £10 million less to spend on other things. It will undermine the competitiveness of companies providing added-value products whether they be concrete, brick manufacturing or concrete brick manufacturing. Job losses will run into hundreds and potentially more.

113.

Dr McMorris: Bearing in mind what is currently happening with fuel, it is also another opportunity for people to make money by running things backwards and forwards across the border in various ways. If we cannot stop tanker loads of petrol, how will we stop the odd load of gravel and so forth?

114.

The Chairperson: Could you get copies of the Milford Group report for the Committee?

115.

Mr Ennis: Certainly.

116.

The Chairperson: You made a point on the ESB tendering. Was it unable to tender because it did not have enough capacity? Was it anything to do with the interconnector?

117.

Mr Ennis: No, they did not have the capacity.

118.

The Chairperson: Will Coolkeeragh coming on in a few years’ time hold out any hope of reduced prices?

119.

Mr Smyth: Very much so. That will be our first real competition. There will be competition from Scottish Power and we will then know the benchmark prices. What incentive will there be for Coolkeeragh to bring its power much lower? If it is 2·9p coming in from the interconnector, it will price it at 2·8p. One additional generator will not be enough, but it will certainly bring downward pressure.

120.

The North/South interconnector has a 300-megawatt capacity, and my understanding is that at the moment we are limited to bringing 70 megawatts from the South to the North. That may not be a key issue this year because of generating constraints. However, when the new combined cycle gas turbine plant comes on stream next year, there will be potential for a downward pressure on prices in Northern Ireland. It will be important to ensure that the 70 megawatts are increased. There are technical constraints north of Dublin with the transmission system. We keep talking about the 300 megawatts, but we are limited in what we can bring in from the Republic to Northern Ireland.

121.

Dr McMorris: I would like to make a small point in case I was misunderstood earlier. Blue Circle was aware that a sister company could buy power at 2·9p in Scotland. It was not being offered it from Scotland at 2·9p here — far from it. That was the point we were making about the open market: much lower prices are available on the mainland.

122.

The Chairperson: Thank you. The Committee may need to correspond with you and tease out of some issues. Our current focus is on the energy inquiry. We thought we would cover it in six weeks and almost a year later we are still at it.

MINUTES OF EVIDENCE

Tuesday 25 June 2002

Members present:
Mr P Doherty (Chairperson)
Mr Neeson (Deputy Chairperson)
Mr Armstrong
Mr Clyde
Mr McClarty
Dr McDonnell
Ms Morrice
Dr O’Hagan
Mr Wells

Witnesses:
Mr S Pearson ) Rating Policy Branch, Department
Mr B McClure ) of Finance and Personnel

123.

The Chairperson: Good morning, Gentlemen. I welcome Mr Brian McClure and Mr Stephen Pearson from the Rating Policy Branch of the Department of Finance and Personnel. After your presentation, Committee members will ask you questions.

124.

Mr McClure: I am head of the Rating Policy Branch in the Department of Finance and Personnel’s central finance group. Stephen Pearson is principal economist in the Rating Policy Branch. Thank you for this opportunity to give an overview of the review of rating policy and to speak about industrial derating. This is regarded as the start of the consultation. We are happy to return to the Committee at any point during the consultation.

125.

Twelve key issues have been identified in the consultation paper. All Ministers have had the opportunity to contribute to the paper, which was prepared by an interdepartmental steering group. The key issue that we are concerned with this morning is industrial derating, although we shall be happy to discuss any other matters on which the Committee wishes information.

126.

Among the other 11 issues are domestic re-evaluation and the funding of the Water Service; small business relief and hardship relief may be more directly concerned with industrial derating.

127.

However, the main issue this morning is whether the removal of industrial derating should be considered; before I speak about that, there are some points to note about the wider review. The Executive initiated the review in 2000 after the outcry about the increases in the regional rate. I hope that it will be completed in the autumn; it is difficult to be precise about when in the autumn, because we do not know what sort of response to expect from the public. The response will determine when the review will be completed.

128.

We are having a review because Ministers considered the system to be out of date; it does not meet present needs and is not as fair as it could be. The public consultation began on 27 May with the Minister’s statement, and I gave evidence to the Committee for Regional Development on 29 May.

129.

Public consultation events took place on 11, 12 and 13 June in Enniskillen, Londonderry and Belfast. Attendance was disappointing, as only a handful of people turned up for each. However, the web site has had 9,000 visits since 27 May; 2,500 of which have downloaded the document. The events kicked off the process. Opportunities will be afforded to interest groups and organisations to present their views.

130.

Although 16 September is the closing date for responses, the Minister is aware of the timetable for Committees and district councils — more time will be afforded to them.

131.

The question is asked when change will occur. The decision-making process will commence after the autumn when the responses from the public consultation are known. At that time, impact analysis will be carried out and the Executive will have recommendations and options. Legislation will have to be approved by the Assembly during 2003-04 and beyond.

132.

Industrial derating is the major relief in the Northern Ireland rating system, and its costs are £64 million rate revenue foregone. If the industrial sector was fully rated and the same amount of revenue raised from the rates, a regional rate reduction of 16% would result in the non-domestic sector; this would reduce rate bills by about 8%. There are two ways of looking at it: either £64 million is foregone or everybody would pay a little less.

133.

Winston Churchill introduced industrial derating into the United Kingdom in 1929 when he was Minister of Production. However, it is now unique to Northern Ireland; no other jurisdiction offers relief on local property taxes to the industrial sector. It applies to all businesses that produce or alter an article by manual labour. The legislation for this is based on the Rates (Regional Rates) Order (Northern Ireland) 1997 and the Factories Act (Northern Ireland) 1965. Any premises where an article is manufactured by manual labour, except for premises predominately used for retail or storage would, prima facie, be entitled to industrial derating.

134.

Among the premises entitled to industrial derating are Quick Copy in Bedford Street, Belfast. Its premises have a net rateable value of nearly £22,000, and the rates bill would be about half that. The Newtownards Chronicle is also entitled to industrial derating. The cases quoted have been brought before the Lands Tribunal, which decides these matters. Another example is R K Trucks of Carryduff.

135.

A striking example is Granville Cold Storage in Dungannon. Its premises are used for European Union intervention storage, which was deemed to be the altering of an article by the storage of meat on the premises. It may not usually be associated with manufacturing, but the courts decided that it is entitled to industrial derating.

136.

Dr McDonnell: What was altered?

137.

Mr McClure: The court decided that molecular alteration to the meat rendered it suitable for sale. It was rather a strange decision; nevertheless, it must be followed.

138.

The interdepartmental steering group handling this review commissioned a firm of consultants to carry out a study of industrial derating on Sliderobes (NI) Ltd. The steering group comprised the Department of Finance and Personnel, the Department of the Environment, the Department for Regional Development, the Department for Social Development, the Department of Enterprise, Trade and Investment and the Economic Policy Unit. The terms of reference were drawn up by a sub-group, the chairperson of which was from the Department of Enterprise, Trade and Investment, with the involvement of the Department of Finance and Personnel and the Economic Policy Unit. As a result, DTZ Pieda Consulting, a firm of economic consultants, was selected and the study was signed off in March 2002. The Committee Clerk has been provided with a copy of the DTZ Pieda Consulting report.

139.

The study was to consider the effectiveness and continuing relevance of derating as a tool to assist international competitiveness. That was the original aim of industrial derating in 1929. A cross-section of derated companies was interviewed, and representative groups such as the Confederation of British Industry and the Institute of Directors were consulted. Comparisons were drawn with elsewhere.

140.

The study found that the rationale for derating is questionable. The economic impact evidence suggests that rates would raise costs by an average of less than 0·5% of turnover. However, the study found that derating may be important to small firms; a disproportionate amount of their outgoings is spent on rates.

141.

The conclusion was that removing derating would have little long-term impact, and the consultants recommended that there was a case for phased removal.

142.

The DTZ Pieda report informs the debate on the issue; the Confederation of British Industry, however, has a different view. Derating partially compensates for extra costs on electricity and transport and the general costs that fall to Northern Ireland because of its peripheral location. The other opinion is that it is a powerful incentive for inward investment and a good counterbalance to the attractive fiscal regime of the South of Ireland, particularly in corporation tax.

143.

Others believe that there is considerable dead weight in blanket derating. "Dead weight" is an economist’s expression, meaning that it benefits many people who do not need benefit. For example, if derating is given, the benefit passes to landlords who simply seek more rent. However, not all premises are rented; there is considerable owner-occupation in the industrial sector in Northern Ireland. Nevertheless, it is a consideration.

144.

Finally, if the additional electricity costs faced by Northern Ireland industry are an impediment to economic prosperity, there is an argument that electricity should be subsidised instead of doing that through the tax base.

145.

A strong view was expressed that industrial derating is important to sustain employment. One questioner who read the report felt that 0·4% of turnover, which was identified as an average effect on a firm, is a significant amount. A representative of the software industry asked why it had not been consulted for the study. The software industry is not generally entitled to industrial derating because of the stipulation about the use of manual labour in a process. A view was expressed that it should be extended to other important sectors such as the hospitality and tourism industries. A contrary, and perhaps extreme view, was that the agriculture industry should be rated. Another questioner asked whether domestic ratepayers should, in effect, be subsidising business.

146.

It is clear that derating is important to some firms and attracts inward investment. The key question is: how significant and important is that? Many in the industrial sector did not recognise this subsidy. It was interesting that only a small percentage of those who were surveyed in the study knew their rate liability.

147.

The review rules nothing in or out, except for agricultural rating and domestic water metering. Responses from the consultation and the impact analysis will feed into the process before decisions are contemplated. Any change will be phased in gradually, and transitional arrangements will be put in place to protect vulnerable groups and those facing hardship.

148.

The reinvestment and reform initiative is important, but fairness was the driving force behind the rating review. However, the reinvestment and reform initiative adds focus to the rating review.

149.

Mr Wells: We have heard the views of the Confederation of British Industry. I may be the only member of the Committee old enough to remember the introduction of industrial derating in 1982, which was one of the few achievements of the old Assembly. I remember clearly everyone dancing in the aisles in 1982 when we achieved that concession from the Department.

150.

It was introduced because Northern Ireland was uncompetitive, particularly in energy prices, and also because it was on the periphery, although that has become less important. However, there was a gap between the energy prices endured by our companies and the next lowest region of the United Kingdom. The Confederation of British Industry said that when energy prices, which are a mixture of distribution and generation costs, are tackled it would accept industrial derating. We are all working towards that goal, but we are nowhere near it. Would it not be unfair to inflict industrial derating on our big employers until there is a level playing field with the rest of the United Kingdom and with the Republic?

151.

Mr McClure: Until 1982, 75% derating was applied; in 1983, that was extended to 100%. There is an argument that the service sector suffers as much as the energy sector through costs. I am aware of the evidence given by the confederation, and we have met it to discuss the additional costs. That is tied up with the 10-year electricity supply contracts. The Confederation of British Industry view is that once the contracts come to an end, there is a case for phased removal.

152.

Mr Wells: Is that not a reasonable stance?

153.

Mr McClure: Is there not a better method? Another view is to subsidise electricity rather than use the local tax base to compensate. The service sector as well as manufacturing faces disproportionately high electricity costs.

154.

Mr Wells: Let us assume that it is only 0·4% — £61 million. That is £61 million from the bottom line. Including the rates and levying the charge at £61 million is net additional cost, which will simply transfer to the profit figures. That is significant. Companies get nothing for the £61 million; it is money down the drain. Bombardier Shorts will pay £1 million to get its bins emptied and the streets swept, but they will not be swept any better because the company is paying an extra £1 million a year. There is no benefit to the companies; it is purely tax. That will translate through the balance sheets as a loss or a smaller profit.

155.

Mr McClure: According to the DTZ Pieda Consulting report, the cost will not be significant for most firms.

156.

Mr Pearson: Presumably it would hit the smaller firms harder.

157.

Mr Wells: It is a tax of £425 a job. If you add up all the employers who will be affected and divide that by £61 million, it works out at £425 a job. Some companies will decide not to extend their recruitment or will lay off staff because of that significant burden, particularly companies with a small staff and a high rate liability. That is the average. Companies could have to pay £1,000. I am playing devil’s advocate. It could come on top of a 1% increase on National Insurance contributions up to the highest salary, fuel duty and other expenses. Businesses would ask whether that was fair.

158.

Mr McClure: Fairness between the manufacturing sector and other sectors is an issue. Even in the manufacturing sector, the software industry is not entitled to rating relief.

159.

Mr Wells: Not unless they put their computers into cold storage.

160.

Mr McClure: That seems to be the trick.

161.

Mr Pearson: It is telling that only 7% of the firms surveyed said that industrial derating was of any significance to them. A representative sample does not seem to think it important to business.

162.

Mr Wells: However, all their umbrella bodies are vociferous about it. Mr Neeson and I gave a presentation at the Federation of Small Businesses conference. The federation was clearly concerned, as are the Confederation of British Industry and major employers such as Bombardier Shorts. Bombardier Shorts considers this a major issue — £1 million in one fell swoop. There is always difficulty in border areas. They do not have to be in Northern Ireland; they can hop across the border and set up in the Republic.

163.

Mr McClure: I accept your point, but derating is a blunt instrument. Some of the businesses I cited are not competing internationally. That is also an issue. They are local businesses competing with other local businesses. The fiscal regime in the South is attractive to industry. Derating is such a blunt instrument that it applies to many businesses that are not inward investment businesses.

164.

Many businesses that benefit from derating are not inward investment businesses; small business relief may help them, as it would apply to all sectors and not just to manufacturing. Small business relief could be available to all service sectors including manufacturing and software. There are proposals to introduce that in Great Britain in the future.

165.

Mr Armstrong: What was your objective for derating and why could it not stay as it was? Was it to encourage more revenue into Northern Ireland or was there another reason?

166.

Mr Pearson: There are several aspects to derating. It has been in place since 1929 and it is now out of date. At the time, it was applied to assist with international competitiveness when most of the industrial base was the production of widgets. We have moved on in 75 years, and the economy is now much more diverse. Many argue that it is not adequate for present needs.

167.

Mr Armstrong: Some companies are derated to make them more competitive in the export market. We must compete with the rest of the world; therefore we must have an incentive to make exporters more competitive. If revenue is needed it should come from some other source.

168.

Mr Pearson: That is a valid point, and the question is still open. However, derating may not be the most effective way of achieving that because of the range of properties it applies to. It excludes certain sectors and includes other that may not fit the criterion and are not export companies.

169.

Mr Armstrong: Should companies that export still have that facility, and should those that supply the home market be fully rated?

170.

Mr Pearson: We are interested in such a response, and if the consultation finds opinions strongly in favour of that approach, it will be reported to the Executive.

171.

Mr Armstrong: We need an incentive in Northern Ireland to export our many products. If extra revenue is needed for hospitals or roads, it should come from another tax. Although we do not have the remit, I would be in favour of a 1% increase on tax. That would solve many problems, including derating.

172.

Mr Pearson: There is also a European Union dimension in terms of providing assistance to industry. State aid could be used to help Northern Ireland with its exports.

173.

Mr McClure: Industrial derating is registered as state aid.

174.

Ms Morrice: Is it legal under European Union law?

175.

Mr Pearson: Industrial derating is legal and registered as state aid; it is subject to annual review. There was an opinion in favour of local income tax on each day of the consultation. Local income tax is not covered in the consultation paper; however, if there is a strong opinion in favour of it, it will be reported to the Executive.

176.

Mr Armstrong: Not every rated company is a profitable company. Income tax will only take tax off profit. The companies that are not doing well will not pay tax. I do not mean a Northern Ireland income tax; it should be a Westminster tax, but we have no say over that.

177.

Mr McClure: There are much wider issues associated with that.

178.

Mr Neeson: The Assembly should have tax-varying powers, and the Committee endorsed that view in its response to ‘Strategy 2010’. It is sad that that is not considered in the review. DTZ Pieda Consulting has underestimated the strength of feeling among companies about the derating proposal. Is there a time scale for the gradual phasing-in?

179.

Mr McClure: No. DTZ Pieda Consulting identifies a two-year period in the report. That is very sudden. I am not sure whether it would be possible to avoid hardship while introducing a measure over two years. However, that is the consultants’ recommendation.

180.

Mr McClarty: What size was the sample survey of companies?

181.

Mr Pearson: One hundred companies were surveyed, which represents about 2·5% of the derated manufacturing sector.

182.

Mr McClarty: Does that mean that the vast majority of them said that there would be no incentive?

183.

Mr Pearson: Seven per cent felt that there was no significant incentive in industrial derating.

184.

Mr McClarty: Seven per cent of the 100 companies surveyed?

185.

Mr Pearson: Yes, 7% of the sample.

186.

Mr McClarty: Therefore 93% felt that there was?

187.

Mr Pearson: The remainder either did not know or said that it would have no effect.

188.

Ms Morrice: How does it compare with the corporate tax relief in the South?

189.

Mr McClure: There is no comparison. No in-depth analysis of the two regimes was carried out. The derating that applies here would still not match the package available in the South.

190.

Ms Morrice: Should that not be taken into account in the review? Has research been done to compare state aid to industry north and south of the border to create a level playing field?

191.

Mr McClure: That must be completed before a final decision can be made. However, DTZ Pieda Consulting found that derating seemed to be of most importance to locally based firms that compete with one another rather to than those that compete in an international market place or those that could be classified as inward investment cases. DTZ Pieda Consulting did not find that to be an important location factor to those firms that settled in Northern Ireland. A full study of the economic impact would be required before change happened.

192.

Ms Morrice: On the island of Ireland, I think.

193.

Mr McClure: Yes.

194.

The Chairperson: What is the monetary value of the policy to industry?

195.

Mr McClure: Sixy-four million pounds.

196.

The Chairperson: Thank you for your evidence. Will you be available if we have further questions for you?

197.

Mr McClure: Yes, of course.

MINUTES OF EVIDENCE

Tuesday 3 September 2002

Members present:
Mr Neeson (Deputy Chairperson)
Mr Armstrong
Mr Clyde
Ms Courtney
Mr McClarty
Dr McDonnell
Mr McMenamin
Ms Morrice
Mr Wells

Witnesses:
Mr Tom Gillen ) Irish Congress of Trade Unions
Mr Jim McCusker )

198.

The Deputy Chairperson: Welcome, Mr Gillen and Mr McCusker, from the Northern Ireland committee of the Irish Congress of Trade Unions. Please make a short presentation before we ask questions.

199.

Mr Gillen: Thank you. We are pleased to be here. I will speak briefly on the short paper that I submitted on behalf of the Northern Ireland committee several weeks ago, and Mr McCusker will cover some of the details.

200.

Equity in the rating process is a horizontal principle throughout the Programme for Government, and there are some inequities in the present system, especially when domestic rates are compared with industrial and commercial ones. We will be highlighting them in our response to the broad review of rating policy.

201.

With regard to industrial derating, we note the DTZ Pieda report and the figure of £64·3 million. That study concluded that derating is not a cost-effective tool of economic development, a pretty harsh statement that needs to be addressed during the overall process. The ICTU sympathises with employers who are in a difficult situation, and Mr McCusker will elaborate on that. Hired transport and fuel costs also affect our competitiveness.

202.

The review continues, but we are not convinced that there is total justification for industrial derating to continue in its present form. There could be better targeting, and that will emerge through discussion and debate. I rest my argument there. My colleague wants to discuss further details, and we also want to answer the Committee’s questions.

203.

Mr McCusker: I want to make three points. The first relates to the deficit in funding for infrastructure — which means that we must critically examine possible sources of revenue. With regard to the rating review, two main sources of lost revenue are industrial derating and vacant property, which account for around £100 million per annum. That could support the borrowing of £1·4 billion, which would make up a sizeable part of the deficit of £6 billion for funding public capital projects. I agree that a good case for continuing exemption is needed, especially as domestic rates are being increased at a higher rate than rates for non-exempt business.

204.

The second point is that industrial derating is equivalent to a subsidy, and in return for a subsidy, there must be economic benefit. Most of the £60 million subsidy goes to companies that are not apparently making any additional contribution to economic development. However, as Mr Gillen said, if any company can show that there is clear economic benefit, the trade union movement will reconsider the question of industrial derating.

205.

The third point is that one of the main aims of the Department is to promote knowledge-based economy, and I understand that the Committee shares that aim. However, industrial derating discriminates against a knowledge-based economy because a company needs to be engaged in an activity that involves manual labour before it qualifies for industrial derating, and a knowledge-based economy or industry does not normally involve manual labour. The view of the ICTU is that industrial derating appears to run contrary to the economic development policy articulated by the Department and supported by the Committee.

206.

We discussed those issues over a year with the Confederation of British Industry (CBI) and said that if the CBI could make a convincing case, we would reconsider the matter. We have yet to hear anything that convinces us to support the present form of industrial derating.

207.

Mr Wells: I am surprised that you did not deal with the other so-called benefit of industrial derating. Northern Ireland competes for inward investment with businesses throughout the world. It often competes with the Irish Republic, which offers an attractive package for inward investment. One of the cards that was used by the old Industrial Development Board (IDB), now Invest Northern Ireland (INI), was to say to potential manufacturers that there would be no local tax or rating on the manufacturing process as there is in other parts of the world. Do you not consider that to be an attraction that would justify the retention of derating?

208.

Mr McCusker: The DTZ report examined that and concluded that it does not seem to be an incentive for foreign investment. We see little evidence that it is a big attraction to industry. The DTZ report shows that the proportion of costs imposed, particularly on larger industries, is so small that it is unlikely to be a motivating factor when a company is deciding where to locate its mobile investment.

209.

Mr Wells: If we were to abolish derating, how do you suggest it should be done? For some companies it would be a big hit very quickly. For instance, Shorts would pay an extra £1 million a year immediately, because it occupies a great deal of space. Should it be phased?

210.

Mr McCusker: Yes. It should be phased, but while the cost to big companies may appear large, in overall terms it does not seem very big. Another point which may need special consideration is that for very small businesses, as the DTZ report shows, the amount may be a greater proportion of their costs so should assistance to them to ease that burden come from some relief in the rates system or from one of Invest Northern Ireland’s schemes? The point is made somewhere in the DTZ report that it is not ideal to target assistance using the rating system — it might be better to target it through the assistance which is available from Invest Northern Ireland. Whether there should be any special scheme for an interim period for small businesses is a point which must be considered.

211.

Mr Wells: One of the main reasons that industrial derating was brought in was the great disparity between energy costs here and in the rest of the UK and, indeed, the Irish Republic. Is there any justification for going down this road until we have tackled that problem? Surely, the CBI’s view is that eventually this is going to happen, but that it can only happen when there is a level playing field with energy. Surely, that is better than going for the immediate abolition of derating.

212.

Mr McCusker: Energy costs for everybody are higher in Northern Ireland, and domestic ratepayers could make the same point. In fact, they could say that domestic ratepayers have little choice about paying the electricity charges imposed on them. Larger companies have a choice, and some can get electricity at a lower rate than domestic ratepayers. It is a question of equity between domestic and non-domestic.

213.

If there is a case for subsidising business energy costs, it is best done through a separate scheme and not by way of the rating system. That has been done in the past with subsidies paid by the Department to ameliorate the cost of electricity for everybody in Northern Ireland.

214.

Ms Courtney: When the CBI came in I did not consider it as that. Mr McCusker gave the amount lost through the derating of vacant property, and I think he said that £8 billion could be gained for infrastructure. Coming from Derry where new development has virtually stopped — there has been a moratorium since the start of April until money is available to get it up to EU Directive standards — makes me think that there is something to be said for this Bill. If that amount of money could be raised, and I am not saying that it should not be phased in, there is a big argument for stopping industrial derating.

215.

The Chairperson: That is more a comment, Ms Courtney.

216.

Ms Courtney: It is to do with the amount of money — we are talking about £18 million just to upgrade the sewerage system at Culmore. The money is not forthcoming at the minute — it may be at some time — but at the minute there is a moratorium on all development in our area. There are about 5,000 construction jobs under threat, and some already have gone. So, given the figure that Mr McCusker gave, there is a strong argument against the CBI argument.

217.

Mr Armstrong: I am opposed to increasing the rates because it would be the thin edge of the wedge for other rates increases. There has to be an incentive for our exporters. We cannot charge a levy on companies that import products here because it is against EC rules, so why should we impose a tax on our exporters? An increase in rates would be ongoing. Once started, it would be a way of creating income, but it would be taxing companies and people who might not be just so profitable. The Government should rethink this.

218.

Unfortunately we do not have the power to raise income tax, but it would be more sensible to have a 1p increase in income tax across the United Kingdom to alleviate this problem rather than to impose a tax burden on Northern Ireland people. If we are to have tax raising powers in Northern Ireland, it should be for special commodities such as chewing gum. Items that cost our country money should be taxed, not people in an unprofitable situation. We should only tax people in profitable situations. This is why I oppose an increase in rates.

219.

Mr Gillen: In the past we have said that we do not see a justification for this full £60 million. Domestic ratepayers are also suffering. The DTZ report shows that there would be little impact on the manufacturing and industrial sectors if they were to pay the increased rate, which, when spread across the board, will probably not be that much. We are not totally against it, but there needs to be a phased review. We are sympathetic to the needs of smaller enterprises, on which this may impact on more.

220.

From this report and from discussions with other parts of the community and business, I know that there is a strong view that industrial derating is not producing the benefits that it could. Clear evidence suggests that if we tax vacant property we could lever £1·4 billion. A current deficit of £13·8 million has been highlighted by the Executive, which can fund £7 million; so another £6·8 million is required. If we are interested in the overall public good, which has been mentioned, there should be some kind of change in the industrial derating pattern, which would generate more than is being generated at present. A review of this, with some reduction and phasing, would create that benefit, lead to more employment and ease the burden on the domestic ratepayers. It would also make us more competitive.

221.

Mr Armstrong: Demonstrating the thin edge of the wedge are the 100 jobs lost in Dungannon yesterday. That small amount of money could help keep companies alive. Think, for example, of the rates increase that companies such as United Dairy Farmers or Bombardier would have to pay.

222.

Mr Gillen: I am not sure of the exact figure that Bombardier has to pay, but the evidence is that if this is spread over the entire enterprise it will not damage its competitiveness in manufacturing. The loss of more jobs in Desmonds obviously concerns us. Of course, the entire textile industry has been suffering for some time now, and it is not industrial derating that has caused that — it is world pressures. Interestingly, Desmonds said that staffing was an issue.

223.

Obviously it is for the Department for Employment and Learning to see that proper training and facilities are provided. It could be something to do with the modern plant. We do not welcome that, but industrial derating was not a factor in the Desmond’s announcement.

224.

Mr Armstrong: I agree, but a company is in a more profitable situation if it does not have that extra bill to pay. Anything that starts tends to snowball because it is a handy way of getting revenue. That is why I am opposed to it.

225.

Ms Morrice: I am very interested in this. I have a couple of observations and a couple of questions. One of the problems here seems to be the need for more money for other things, particularly infrastructure. A case that I, and others, have often put to the Assembly is that road accidents cost the economy £400 million a year. That includes the cost of hospitals, police and ambulances and the effects of the loss of jobs and working time. The Public Accounts Committee came up with that figure. Why are we not thinking out of the box? If we put much more money into road safety, we could make savings. Rather than cut benefits that are given to industry, let us use other ways to find this money.

226.

That is my first observation. The second is to do with manufacturing industry. I am well known for my defence of textiles, shipbuilding and food processing. Northern Ireland needs to keep a handle on value-added work in these areas to compete with developing countries in the Far East. These industries employ people. Mr Armstrong is right. We have just heard about what is happening to the textile sector. These industries need help rather than have their benefits cut. We do not want to hit industry. I am very interested in the view of the trade union movement on this. Are there not other ways of raising money, such as toll roads? Can we not look at them? How many jobs could be lost with the removal of industrial derating?

227.

Mr McCusker: On the first point, to finance the infrastructure deficit we need to look at all possible sources of revenue. Road accidents are one; this is another. The deficit in funding for capital projects is such that we have to look at everything critically, and when we look critically at industrial derating, we wonder what economic return we are getting for that subsidy. The CBI has failed to persuade us that we are getting a reasonable economic return for the £60 million that is being invested. The DTZ report did a detailed economic analysis of the impact on industry in great detail and did not find that it was likely to have any great employment consequences.

228.

Ms Morrice: Can you be convinced of that?

229.

Mr McCusker: Rating is a small proportion of costs, particularly for larger businesses. Rises in wage costs are much more significant.

230.

Ms Morrice: Could they not use it as an excuse?

231.

Mr McCusker: Companies use all sorts of excuses. Whether they are valid is always debatable. We fail to be convinced that this is the best use of that £60 million of public money. The CBI has supported the proposals of the Milford Group, which suggest that there should be tax relief for expenditure on certain areas, such as research and development and training. They do not suggest that it should be given across the board.

232.

Ms Morrice: And that it be targeted?

233.

Mr McCusker: Yes. This is totally untargeted. Mr Armstrong talked about exports: many companies take the subsidy and give nothing in return, and that is the greatest problem with it.

234.

Ms Morrice: Are you saying that by removing industrial derating the subsidy could then be given only to companies that export, research or innovate?

235.

Mr McCusker: There is a case for giving public funds to companies that lead the way in research and development or to those with higher than average exports. Such schemes should be coming from Invest Northern Ireland: we should not be trying to modify the rating system to provide such benefits.

236.

Mr Gillen: This goes back to innovation, which Mr McCusker mentioned earlier. Innovation is a main plank in the Department of Enterprise, Trade and Investment’s corporate plan, which has been supported by the BEST Report. That report has been seized by the universities and Invest Northern Ireland and has been greatly praised by the Department itself. We will be lobbying on the universities’ behalf for an increase in research funding, and the money that the £60 million can lever out will produce better results in the longer term without inflicting serious injuries on the manufacturing sector. If some sectors in Northern Ireland are in decline, we must build up other areas where we feel we can compete more effectively.

237.

Ms Morrice: I do not subscribe to that school of thought. I do not believe that our reputation for textiles, food produce or even shipbuilding has gone. There are ways of diversifying, and those areas should not be allowed to decline. When the dot com age goes — and it is going already — what will we be left with? People will always need clothes regardless of where they are made. If it is more expensive to produce clothing here, we should be dealing with that.

238.

Mr Gillen: I did not intend to give the impression that I welcomed a decline in any of those sectors. We know that just manufacturing textiles is no longer enough — producing things that people want is key. The agri-food industry is of major importance, and it needs to be developed with high value-added products. Processing is extremely important — the primary slaughter of animals is not sufficient, we need to develop in other ways. This ever-so-slight change with £60 million to generate hundreds of millions of pounds, together with the other issues that Mr McCusker referred to, are very important. This is an overall examination, and the £13·8 billion must be found to improve our quality of life and make us more competitive.

239.

Mr McMenamin: You talked about a more targeted approach to relief to assist parts of industry. I presume that the textile industry would be included. Calling for a levy on foreign textiles might be a start. I favour business parks and cross-border tax-free zones as ways of attracting inward investors: they might entice companies here. You mentioned research and development. How much do the companies that are not paying rates put into research and development?

240.

Mr McCusker: I am not aware of any figure. I do not think the DTZ report went into that type of detail. It begs the question: what is the best way to assist companies that are to the fore in research and development? Again, we return to the point that the present system of industrial derating applies to every company, whether it is engaged in any form of research and development or not. That is one of the subsidy’s deficiencies.

241.

We experimented with industrial parks and enterprise zones in the 1980s. Various concessions were given on rates and other levies. However, experience and research show that they did not work. We would like to see penalties on imports of textiles, but that is totally off the agenda as a result of EC competition rules. What concerns trade unionists is the World Trade Agreement 1994 because that concentrates on some of the inputs into costs without addressing labour costs or labour standards. The international trade union movement has been arguing for some time that what it wants is a level playing field so that Desmond’s in Northern Ireland can compete with the company’s factories in Morocco and elsewhere. The way in which people are exploited in the developing world by some textile conglomerates is, from a human point of view, unreasonable. Even from a competition perspective, it is unfair.

242.

Mrs Courtney: Mr Armstrong mentioned the closure of Desmond’s in Dungannon, with the loss of around 103 jobs. If any area in the textile industry is suffering it is the north-west. Mr Wells said earlier that rates are not paid on vacant property here. Should another company take over a vacant factory, is it exempt from paying rates?

243.

Mr McCusker: Yes.

244.

Mrs Courtney: Would that be an incentive for firms to close instead of trying to preserve jobs?

245.

Mr McCusker: That is another aspect of the debate on the rating review, but that also applies to domestic property. If an individual owns a vacant property, he does not have to pay rates on it.

246.

There are arguments as to whether a demand that rates be paid on vacant property would act as an incentive to keep businesses open. We have yet to reach a final decision on that but we would tend to be of the opinion that it does serve as an incentive. However, others would argue that, in blighted areas, an incentive must be given that a property may remain vacant for a while after it has been refurbished or riverside flats may remain empty for a while after they have been constructed. Time must be allowed for people to take possession of them, upon which they will start to pay rates.

247.

The Department of Finance and Personnel is saying that there is around £40 million in revenue forgone because we do not insist on collecting rates for vacant property, both domestic and non-domestic.

248.

The Deputy Chairperson: It is a big issue and there are many different points of view.

249.

Mr Wells: You used a neat throwaway line that the money that would be generated as a result of the abolition of industrial de-rating would be £1.4 billion, and that money could be used for capital investment. That is not how government normally works. The Government do not borrow. A sum of £60 million would be spent annually on capital projects, which would provide Mrs Courtney with the £18 million for Culmore and a couple of sewage works in my South Down constituency. Apart from the exceptional mechanism that was used this year, the Government do not normally use revenue to generate loan funding, which is spent on capital investment. Therefore, how do you arrive at a figure of £1.4 billion?

250.

Mr McCusker: First, the figure of £1.4 billion was based on £100 million of revenue forgone. We are saying that there is a tendency in Northern Ireland to fund capital projects. Capital projects should endure. For example, our sewerage system has lasted for around 100 years. It is wrong to use revenue to provide for capital costs, and that is what the reinvestment and reform initiative is partly about. It is quite proper that money should be borrowed.

251.

Money can be borrowed against revenue. One hundred million pounds of revenue can fund the borrowing of as much as £1·4 billion. That is the route to take. The problem is mainly with the infrastructure; it should last up to 50 years. Most people borrow money to provide a home for themselves, and it is acceptable to use one’s revenue to borrow for a capital sum. The revenue of £100 million could be used if the Government wished to fund the borrowing of £1·4 billion.

252.

Mr Gillen: The Programme for Government referred to the rating policy review and a working group on public-private partnerships (PPP). Those are linked, and ICTU has been asked to suggest fresh and innovative ways of generating money to meet the infrastructural deficit. One of ICTU’s proposals is to link the review of industrial de-rating into the Programme for Government, look at the proposals relating to PPPs and see what alternatives can be brought to generate funding.

253.

ICTU is concerned that the private sector will not be committed — and therefore unable — to meet the needs of the infrastructural deficit. The private sector may not want to take the associated risk, and that will mean that the Department will end up underwriting the risk. The Programme for Government, PPPs and the rating policy review are all involved in the process, but ICTU does not want them viewed in that order. ICTU wants to see how they can create some kind of synergy and generate money to improve infrastructural services and create jobs.

254.

The Deputy Chairperson: It is a major issue with inter-linking factors.

MINUTES OF EVIDENCE

Tuesday 3 September 2002

Members present:
Mr Neeson (Deputy Chairperson)
Mr Armstrong
Mr Clyde
Ms Courtney
Mr McClarty
Mr McMenamin
Ms Morrice
Mr Wells

Witnesses:
Ms Gillian Briggs )
Mr Wilber Mayne ) Ulster Farmers’ Union
Mr Greg Shannon )

255.

The Deputy Chairperson: I welcome Ms Gillian Briggs, Mr Wilber Mayne and Mr Greg Shannon from the Ulster Farmers’ Union to this morning’s Committee meeting.

256.

Mr Mayne: I thank the Committee for inviting us. We are happy to respond to the consultation paper; Mr Shannon will give a summary of our thoughts on it. The Ulster Farmers’ Union represents a wide spectrum of rural interest through its membership and also in the wider community.

257.

Mr G Shannon: I shall briefly run through three major points raised by the examination of the rates procedure, after which my colleagues and I can answer questions. If the Committee wishes, we can provide formal written responses to any questions.

258.

First, the union represents the vast majority of commercial farmers. There are about 13,000 members, including many large farmers and a rump of small farmers who are concerned about the implications of environmental legislation and everything that affects the countryside. We have always been conscious of our upstream and downstream linkages, even if we sometimes have head-to-heads with them. They are vital to the rural economy, since those firms and businesses support us, and we support them. They take our produce and do the best they can to make money for themselves and for us. As a result, the potential livelihood of a wide spectrum of people depends on the success of agriculture. Therefore, considerable emphasis should be placed on the issues which we shall raise today for the benefit of the countryside. Essentially, rates are regarded as another tax on the community. The existence of such a tax must be justified by the value of what it gives us and how that is delivered.

259.

We propose to cover the matter in three distinct points: the concept of rates; the calculation of rates; and concessions. The current concept of rates is far removed from the original idea of using them to look after the local policeman, the poorhouse and so on. Local support services were minimal at that time. However, councils now carry out a multitude of functions based on the principles of local democracy. We do not question the need