Select Committee on Trade and Industry Minutes of Evidence

Examination of Witnesses (Questions 160 - 179)



  160. What you seem to be saying is that the industry is carrying an ever-increasing amount of goods with a decreasing number of vehicles which seems to indicate to me that your industry is getting more and more efficient. That is the problem.
  (Professor McWilliams) That is technically the case. However, the industry is passing on the cost savings to the customers, that is the problem for the industry, and more than passing them on probably. We do not have figures now to take account of what has been happening to profitability since we had the big rises in the price of oil, so we do not yet know what the latest profitability position is. I should be very surprised if we do not find that a number of firms in the industry are now making losses as a result of what has just happened in the past few months.

Mr Butterfill

  161. You commissioned this research by the Centre for Economics and Business Research Ltd (CEBR) and they produced Table 1 in your memorandum on the impact on tax revenue of diesel price differential on different assumptions; one was assuming there was a price differential of 31.9 pence/litre and the other no difference. Their table purports to show that the Treasury would be better off if they eliminated the price differential. You make some assumptions about the level lost through cabotage, loss of international business for UK hauliers, loss from Northern Ireland cross-border fuel purchases and there is a macro impact of job losses of £810 million. What assumptions were made? Since you have not been able to show us what the job losses were, what assumptions did they make or did they do some research which you did not do?
  (Mr King) Professor McWilliams who did the research might be able to reply to that.
  (Professor McWilliams) We did the research and the assumptions we made were built in there. If you want to know the jobs number, the jobs number which went in there was the jobs number in total for the industry and the knock-on effect of 47,000 jobs. That is a number we produced, it is a number which is consistent with numbers we produced in earlier reports which were published in full and are nothing we are very shy about. We have run that estimate through our model which runs in many ways much the same way as the Treasury model. Obviously what you get out of these things depends on the assumptions you make but that was the considered estimate of the macro impact.

  162. I am just concerned that you have not been able to give us any figures of actual job losses and yet you presumably made some assumptions for this and I wondered how you based them.
  (Professor McWilliams) This is not a number of actual job losses. This is a difference between the number of jobs there would be in one hypothetical set of circumstances where the excise duties in the UK were the same as on the continent compared with the number of jobs we think there actually are.

  163. I just wondered how you based that assumption.
  (Professor McWilliams) It is a model based calculation. Like all these simulations, whether done by people in government or wherever, they are subject to all the problems of making estimates that we all have, but it is the best estimate we could make. Remember it is the difference between a gap now of over 30p and a gap of zero. At the moment I do not think anyone is really seriously considering the possibility that in the short term the gap will be brought down to zero, so in a sense that is why the number is on the large side.

  164. Were you using the Treasury model?
  (Professor McWilliams) No, we used our own model because it is much easier to use and frankly you get the same results. The differences in the results you get from using models do not come from the different models, they come from the different assumptions you feed in when you are doing it.

Mr Chope

  165. Were these the figures which were presented to the competitiveness working group organised by the Government which the RHA says in its memorandum were discussed with a meeting with Government officials where they had the opportunity to scrutinise the base data and to question you on the methodology employed and that that examination established the validity of your data? Is this the data we are talking about and is that accepted as valid by the Government's own officials?
  (Professor McWilliams) The data which was discussed was the same thing but a year earlier on the numbers which existed a year earlier. Obviously the numbers have been updated since then but the underlying methodology has not changed. It was essentially the underlying methodology that we had 17 different Government officials testing, including two from the Treasury and at the end they retired feeling they had not scored very many points.

Helen Southworth

  166. The Government has maintained that whilst the UK has higher fuel duties overall tax is comparable if not favourable in the UK against other European countries. What do you think about the concept of taking the entire burden of taxation against GDP rather than looking purely at fuel tax when you are evaluating these things?
  (Mrs Leeming) When you are considering this the important thing to remember is yes, of course certain elements of taxation are lower in other countries. Given that fuel tax often represents 30 per cent, it is a bigger element, so that is where we think the uncompetitiveness is coming from.

  167. What about lower social costs, employment taxes, corporation taxes? The OECD figures put taxation levels as a proportion of GDP in the UK at around 40 per cent compared with 58 per cent in Sweden, 50 per cent in France and 44 per cent in Germany.
  (Mrs Leeming) That might be the case, I am afraid I am not an expert on that particular element.
  (Professor McWilliams) These OECD figures are absolutely correct and it is perfectly true that the overall tax burden in the UK is low by European standards, higher than in the States, quite a lot higher than South East Asia. These are well known and well understood numbers and I do not think anyone would seriously argue with them. As far as the calculation is concerned for working out how many foreign lorries are likely to be coming into the UK—and the number last year was 884,000—which had gone up from 390,000 in 1992; a huge increase and even last year the increase was about 25 per cent—what is relevant for that is not the total tax burden but the marginal tax burden. At the margin, once they have paid all their taxes, it makes sense to try to take advantage of the fact that they can get the cheap fuel. That essentially is what seems to be driving this business at the margin. It is the marginal comparison rather than the average comparison which is relevant for predicting that. The model we used to work out what the jobs impact might be, what the impact on international usage might be and so on, that model took all these factors into account and predicted, when we ran it a year ago, that the number of foreign lorries coming into the UK would be 799,000 and that was based on the numbers we have just been discussing so far. We are a year on. We know what the numbers actually have been. The number was 884,000, in other words we were underestimating by ten per cent. That is pretty supportive of the fact that the underlying view that cheap fuel prices on the continent, combined with other things like the value of the euro as well, would encourage foreign lorries into the UK. That is what has actually happened.

Mr Morgan

  168. What would the radius of operation of a modern lorry landing at Dover be if it came with a full tank before it has to refuel?
  (Mrs Leeming) Legally they can carry about 1,500 litres, so well over 1,000 miles.

Mr Butterfill

  169. It is not going to be any consolation to businesses struggling to make any taxable profit at all that corporation tax is lower in this country.
  (Mr King) I did not want to say that. The difference between the tax take of a European haulier and a UK one is that the most significant element of tax that the UK haulier has to pay is one he is paying every time he turns the wheel of the truck. It is not something which happens once a year or happens at the end of the month when he pays the staff. He has to keep paying that high level of tax and one of the difficulties faced of course is that the oil companies will want payment for that fuel most often well before that company, that haulier, actually has payment from his customer. The rapid increase in fuel price which has almost doubled the direct operating costs in the space of the last 18 months or so has to be paid for before he in turn gets paid. That is where the real problem exists, that little matter of affording the fuel bill.

Mr Cunningham

  170. You touched on the impact of the euro on this. Can you give us a bit more detail on that?
  (Professor McWilliams) The impact of the euro obviously affects the price comparison in various different ways. It does not affect the basic price of fuel, the underlying cost of oil, which is effectively priced in dollars and just translates at whatever the exchange rate happens to be. What it does do is affect the levels of excise duty and the VAT on that excise duty and the elements of the domestic costs which tend to be fixed in domestic currency rather than being fixed in international currency. So the changes in the euro have affected those elements in the position. It depends which period you look at but the pound over the last year is roughly ten per cent up against the euro and that will have meant that the UK disadvantage in those elements of cost will very roughly have deteriorated by ten per cent.

  171. Worse by ten per cent as a result of the euro.
  (Professor McWilliams) Yes.

Mr Laxton

  172. Since July 1998 there has been no restriction in the EU on cabotage operations and in fact looking at some of the statistics they are quite interesting. In February this year the European Commission found that 68 per cent of cabotage operations were carried out in Germany and in fact only 2.9 per cent here in the UK. In your memorandum to us you say that the threat to domestic hauliers from continental based operators using cheap fuel is real, but looking at those sorts of figures is it more a threat than an actual problem? Would you agree that actually in terms of the UK hauliers we do quite well out of cabotage operations?
  (Mr King) We need to understand what we are talking about in that UK hauliers who are hauling into Europe are happy to compete with European hauliers hauling into the UK and looking for return loads who are able to quote a rate which is significantly below what a UK haulier can do. Even if the UK haulier has his tanks full of French diesel he still has his operating costs and vehicle excise duty which tend to be considerably higher in the UK than in France or elsewhere in Europe. The impact of the continental haulier does not need a great number, although there is strong evidence to suggest now that whereas it used to be 60 per cent of UK-owned trucks crossing the Channel and coming into the country, that figure is now 60 per cent continental trucks coming into the UK. So the ratio has changed. The problem is that they are able to ask for lower rates and that has a sobering effect upon the UK haulier who has to match those rates. There are plenty of examples we know of where continental hauliers have got return loads at very low rates indeed in order to get their vehicle back out of the country and that has undermined the UK hauliers' ability to offer a competitive alternative. There are other factors involved: the use of East European drivers being paid £70 per week at the most; low cost fuel; and of course low vehicle excise duty and the fact that once a continental truck is in the UK it makes no contribution to the road system, social and environmental costs are absolutely zero, you do not charge them anything. Those factors hang over the industry in determining haulage rates. Cabotage of course is when that truck has got into the UK and is then able to haul between two British destinations. It is allowed to do that but it is not allowed to do it on a regular basis. Our belief is that many continental hauliers are doing cabotage on a regular basis which is against EU rules. However, unfortunately, as far as we can ascertain, there is very little enforcement in the UK. No continental hauliers are ever pulled up to ask what they have been hauling, where, how often and how frequently; normal practice I believe in France but not in the UK. We have an enforcement problem here which needs perhaps examining.

  173. That is interesting because usually the argument which is put about with regard to Europe is that we in the UK are very down the line on enforcement and France is anything but. You say that in your judgement there is a complete role reversal in this particular area of activity.
  (Mr King) Yes, to that extent we know of.

Mr Morgan

  174. Whose responsibility is that?
  (Mr King) I imagine the DETR, the Transport Department and the local licensing commissioners perhaps conducting checks on the road. It is not without its complications we admit. We need to establish, and it is very difficult other than hearing it from other hauliers who say some very strange things are going on. Regular contracts are being negotiated with European hauliers within the UK which should not be taking place. They should not be regular contracts: once off, occasional, that is what the rules permit.

  175. Have you made any representations to the DETR on this?
  (Mr King) It is an area we are collecting evidence on. We have not yet done so but we shall do under the auspices of the Road Haulage Forum, which meets regularly with Ministers.

Mr Laxton

  176. Are you not over-egging the pudding a little? You said earlier and in your memorandum to us that thousands of jobs will be lost but you have not provided us perhaps with adequate evidence I would suggest on that. Here you are saying that this is going to be a real problem and yet the EU figures of February this year talk about it being positive in terms of the UK hauliers' position and we are actually doing better in terms of cabotage across Europe than the reverse. The figure is 2.9 per cent in the UK. Do you dispute these figures?
  (Mr King) I suspect, as we pointed out earlier, that these figures are changing very rapidly. They can only look back over a period of time and we would perhaps suggest that when those figures are updated they may show a very different picture. We must await the outcome. Based on the evidence we have in terms of the freight coming into the UK and leaving it, 60 per cent of the traffic is hauled by continental hauliers. Not so long ago it was 60 per cent UK hauliers. We would expect to see some changes occurring.
  (Mrs Leeming) May I also say that when we were looking at the impact of cabotage we were looking at the impact of cabotage on the UK market? We did not concentrate on what the proportion of UK international hauliers were doing in other markets. These figures for jobs were looking at what was happening in the UK.

  177. I find it surprising that you only looked at the impact in the UK because the impact within Europe also could very well sustain many hauliers in business and improve their business activity. I am surprised you did not look at that aspect of it as well.
  (Mr King) Just to illustrate one particular issue which does not appear in any statistics yet we know it occurs is that a tractor unit will bring a trailer into the UK on a Monday morning and will haul that trailer to its destination and come back to the port and then the trailer will go back unaccompanied on the ferry back into Europe and the tractor unit will pick up another trailer and go about its business and come back and the same thing will occur for the remainder of that week using its fuel and lower operating costs to deliver these goods and then on Friday or Saturday it will go back with the trailer into Europe for refuelling. That is one trend which is not picked up by statistics.
  (Professor McWilliams) The issue of cabotage as very technically defined is a little bit of a red herring because it is not a big issue either on the continent or in the UK as a major thing. You would expect it to be slightly more on the continent because of the existence of land borders, easier to get across and so on. The key issue really is return journeys which are much more important in terms of the actual total amount of business which is in effect taken away. It looks from the surveys as though return journeys account for about 20 times as much activity as the cabotage itself; it may be even more than that because there is not enough detail from the official surveys to be able to judge that. The return journeys are very important because what has happened is that there has been a huge increase in the proportion of the two-way traffic taken by the continental lorries. The proportion at one point was 60:40 in the UK's favour; in the early 1990s it was more or less even-Stephen and the numbers have gone up by about two and a half times since then. The latest figures show 62 per cent foreign 38 per cent UK and that change with the associated return journeys is really the big element which has made a massive impact in terms of the overall balance of business. These are potentially profitable international journeys and the ones where it is the foreign hauliers who have gained the lion's share. These are things which we set out to predict when we were using our models and in effect we have verified our models as being on the cautious side in terms of the numbers which have actually taken place.

  178. Have you done any research with regard to cabotage into what proportion is opportunistic and which is pre-arranged and probably very highly organised? Have you ever done any research into that?
  (Professor McWilliams) We have not done any research into that. I do not think that the official surveys actually go into that. I looked at the questionnaire and there was no question in the questionnaire which would make it very easy to determine that.

  179. Is the real problem that what is probably happening is that continental hauliers coming into the UK are extremely competitive and they are actually restricting UK hauliers from putting their prices up. Do you think that a problem? Would it be a fair comment to say that is probably the main problem?
  (Mr King) Yes, it probably is. It is a very, very competitive market. A continental haulier has economies of scale; some of them are very big operators indeed.

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