Select Committee on Science and Technology Third Special Report


Second Memorandum from the Department of Trade and Industry

CORUS plc - Research and Development (HC110)

1.  As stated in its first memorandum to the Committee, the Government's understanding is that the key reason why Corus is restructuring its R&D is to avoid the inefficient duplication of research resources following the merger. This will permit the company to concentrate its research operations where the equipment and expertise of its personnel are best placed to deliver the most effective research effort for the company.

2.  In its report, the Committee drew attention to issues affecting R&D which needed to be addressed within Government policies. Information about this is given below.

3.  Encouraging innovation through R&D is a vital component of the Government's strategy for improving the UK's productivity performance and competitiveness. However, the Government can only achieve this aim effectively through working in partnership with business. The Government can help by creating a business environment and framework which are internationally competitive, giving business the platform from which to innovate. But it is business that must rise to the challenge of making the most of these opportunities. The Government has done much to create a stronger climate for investment and innovation, particularly through a stable macroeconomic policy.

Exchange rate

4.  The Government believes that a strong manufacturing sector is a vital part of the UK economy. It fully understands the difficulties that the weakness of the Euro has caused particularly for the steel sector. The Government, however, does not have an exchange rate target, since previous UK experience has shown that an artificial exchange rate can lead to more market instability. Clearly it is long-term economic stability which matters most for UK business, and the best contribution that the Government can make to secure this by an economic policy based on low inflation and sound public finances. It is this consistent long-term approach which is the foundation for steady growth, investment and the retention of a significant proportion of Corus's R&D operation in the UK. The economic stability and low inflation which have been achieved through the policies pursued by the Government will allow the steel industry to invest and plan ahead with more confidence.

Tax Regime

5.  The UK tax treatment for R&D is already reasonably competitive by international standards. For example, capital expenditure on R&D attracts 100% Scientific Research Allowances, which entitles companies to a full tax deduction for the year in which the expenditure is incurred. The Government does, however, recognise the case for enhancing the tax system further to make the UK a more attractive location to carry out R&D. It has announced its intention, subject to consultation, to introduce a new tax credit for R&D undertaken in large firms from next year. The consultation document, entitled 'Increasing Innovation', was issued by the Treasury and the Inland Revenue on Budget day.

Energy Market

3.  Gas prices paid by industrial users have risen by about 50% in the year to 1 March 2001. The Government has a three-point strategy to address this problem.

  • working with the Commission to increase liberalisation and competition in Europe. In this regard we look forward to the publication of the new Gas Directive;

  • investigating ways of improving the UK market, by for example increasing transparency;

  • referring any potential anti-competitive behaviour to the Commission. One recent example of this is the request for a Commission competition inquiry into the operation of the interconnector.

4.  The Government is also aware of evidence to suggest that the largest electricity users in the UK could be paying higher prices than in some other member states. The New Electricity Trading Arrangements (NETA) and plant divestments have, nevertheless, helped bring about price reductions for both industrial and domestic consumers and continue to put significant downward pressure on electricity prices.

5.  The Government has also introduced the Climate Change Levy. The UK is not alone in having to act on climate change or in using economic instruments to do so. The steel industry will be given special treatment, alongside other energy intensive users, to safeguard international competitiveness. This involves receiving an 80% levy discount in return for its delivery of energy saving targets in a levy negotiated agreement. EU state aid clearance was obtained from the European Commission for almost the entire Climate Change Levy policy package. That included the unique, ten-year negotiated agreements, under which the steel and other energy intensive industries will receive an 80% levy discount in return for making energy savings. It was disappointing that the Commission decided to investigate further the intended exemption of furnace coke and other "dual use" fuels. However the case for the exemption is strong and the Government is confident that agreement will be reached shortly.

Department of Trade and Industry

1 May 2001

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