Select Committee on Trade and Industry Minutes of Evidence

Examination of Witnesses (Questions 424 - 439)




  424. Good morning, gentlemen. Can I welcome you to the Committee. You have been before us, Mr Timms; Mr Hain, can we welcome you as a newcomer to the DTI. We are shamefaced almost—not quite—in having you here so early but we realise that you are now, after three weeks in the job, well-briefed and able to take up our simple questions. In some ways this is a session which some people might have suggested we should have had before Christmas but on the other hand, since then, fuel prices have fallen so that adds yet another dimension to our activity. The memorandum that you have sent us makes the point that, excluding the transport industry, spend on fuel amounts to 1.3 per cent of the value of output in the productive industries and, for manufacturing, it comes to about 1 per cent. Does this mean that road fuel costs at 1 per cent for manufacturing are insignificant, Mr Hain?
  (Mr Hain) I do not think they are insignificant but I think it puts it into perspective. If you look at the wider picture, for example, you see that iron and steel and pharmaceuticals is around 0.5 per cent and motor vehicle manufacturing is between 0.3 and 0.5 per cent. On the other hand if you go to coal, for example, it goes up to 6 to 7 per cent, so I would not say it is insignificant but I think it helps us to get a better sense of proportion as to what the direct impact on overall manufacturing costs is and allows us to compare with wider issues of competitiveness including productivity, investment, skills levels and so on, which the British economy really needs to be measured by.

  425. Maybe I am asking you an easy question to start with but do you think, therefore, that this is an example of the problem which we have had in relation to fuel costs and motoring and transport in general—that there are a number of other costs associated with transportation, either on a personal or an industrial sense, that do not relate exclusively to fuel? This seemed to be one of the problems that the government had in September/October last year?
  (Mr Hain) I think that is a very fair point. If you look at the CBI's figures to you where they said that transport costs represent between 5 and 10 per cent of total business cost, that is a range we would agree with, but it makes a comparison which includes the cost of keeping the vehicles on the roads, the cost of labour, the associated cost of physically moving goods, and if you just identify fuel for these purposes you find it comes much lower to the kind of figures which you quoted to us which we supplied to you—all industry 1.3 per cent and manufacturing only 1 per cent. If I could make one other point, if that would be helpful to the Committee, if you look within both manufacturing and the wider economy, you find that for the goods that are traded such as, for example, the higher value, more specialised, less bulky goods, road fuel costs are lower in relation to the value of output than goods such as coal, for example, which is largely not traded—certainly not going outwards. Others have got high costs, dairy products, for example, at 10 per cent, so I think that enables us to identify the fuel issue again with a sense of proportion, not discounting the impact on the ordinary motorist or road haulier, where it feels very high when you fill your tank up, as you and I would confirm.

  426. I do not wish to suggest for a moment, at this stage at least, that you are being highly selective in your choice of statistics. Do you think you could provide us after the session today with the spread of sectors and how they impact? You have mentioned dairy, and the significance of coal. Could you give us figures, not necessarily at the moment but by way of memorandum, and information on the other sectors and the ones which are higher than coal or which are more dependent on fuel and hydrocarbons in the way the dairy industry is?
  (Mr Hain) I would be happy to do that. Just to give you an indication, fishing is quite high at 6 per cent as compared with cements; lime and plaster is 5 per cent. I will give you the full figures very happily.

Mr Berry

  427. I think that is very important. The memorandum submitted by the Treasury and DTI simply gives us overall figures—a bit of input/output analysis and we get 1.3 per cent and 1 per cent and that does not tell us anything at all about the impact of the individual sectors. I think that information is very important because it is not just the importance of fuel costs in total costs of production; it is the impact of changes in fuel costs whether it is due to oil prices or taxation or whatever. I wonder what work is being done on analysing the effects of these changes in fuel prices which are the immediate cause for concern.
  (Mr Hain) That is a fair point and I gave as an example the figure of coal. The change from 1998 to 2000 in the relevant comparison figures is about a 60 per cent increase. If you go down to a different one, say, inorganic chemicals or dairy products for that matter, there has been a roughly 21-22 per cent increase, so I think the change is an important point. In addition, however, we need to keep focused on where are the rapidly growing and increasingly important sectors of industry in the economy. If you take, for example, computers and office machinery, they come out at just 0.1-0.2 per cent.

  428. How many billions is the 1.3 per cent that is referred to, by the way? In paragraph 6 in the memorandum we have got the 1.3 per cent and 1 per cent but no figures. In paragraph 5, which is relating to what the industry spends on transport fuels, we have got 15.7 billion. Presumably the 1.3 per cent we are talking about here in terms of the road fuels costs as a proportion of output in the productive industry is likely to be several billion pounds, presumably 10-11 billion?
  (Mr Hain) I think it is of that order but, if you like, what I will do is confirm that figure to you when I write.

  429. Can I ask about small businesses? Obviously the government is doing a lot to promote small business development. In the memorandum submitted to us by the Federation of Small Businesses, their opening sentence is, "there is no doubt that the high cost of fuel is the most pressing issue facing small businesses at the current time". Do you agree that the impact of road fuel costs may be considerable?
  (Mr Hain) Yes but I think, again, that it needs to be kept in the same kind of proportion that I tried to identify earlier. When you or I fill up our petrol tanks, as I do every week to go home to Neath, it feels a lot, and I think that small businesses are operating much closer to the level at which you or I might operate, especially if they are very small. It feels very big, therefore, and I would not deny that it has had a large impact but, again, it depends whether they are in the export market, in which case the indication that I have given is that it is not making as big an impact as you might suppose for the traded sector, of which SMEs are an important part. I think we just need to look at this in the round.

  430. Can I finally ask an obvious question about road haulage? Hauliers repeatedly say that they are losing significant amounts of business in the UK due to the UK's relatively high levels of fuel taxation. How do you respond to that argument?
  (Mr Hain) I was very interested in the evidence that the CBI gave to your Committee in which they appeared to say that that was not the case. I think the quote they gave was that their understanding is that their members are still predominantly using UK hauliers. I guess, in the absence of any contradictory evidence, that is quite an important bit of information from the CBI. I do not have any information to contradict that; there has been a whole lot of analysis done to show that the overall tax burden on road hauliers in Britain, if you take it across the board and not simply look at fuel duties, is in fact lower than it is on the continent.

Mr Chope

  431. You say that you have not seen any evidence to contradict these statements. Have you looked at the evidence that has been given to this Committee? In particular on that last point, have you looked at the evidence from the Post Office that was given in a memorandum? Perhaps I can remind you of it. It says, "The Post Office has expanded across Europe through a series of mergers and acquisitions. We have necessarily increased our transport links between the UK and various European countries. However, as a direct result of high fuel costs in the UK, all of these transport legs are currently operated by European hauliers who are able to offer lower rates than either UK companies or even what could be achieved by our in-house transport fleet". Did you read that evidence? If so, is that not the most compelling which shows that what you have just said is a load of rubbish?
  (Mr Hain) I was quoting the CBI. If you are contradicting the CBI which has, as I understand it, the Post Office in its membership, then that is perhaps a matter you ought to take up with the CBI but I am not denying that the Post Office, which has a huge distribution system moving tens of millions of letters and parcels every day, has not been affected by the massive world-wide increase in oil prices—of course it has. I am simply saying that the CBI's evidence, and I have not seen anything to contradict it aside from the evidence you have quite properly put to me from the Post Office, indicates that this has had less of an impact than might have been supposed.

  432. But it is not just the world-wide increase in the price of oil; it is the fact that the fuel costs in this country have gone up by about 50 per cent since the last general election and they have gone up in this country a lot more than on the continent. To give another specific example which I am sure you must be familiar with, we had evidence from CORUS, who said that they spend £100 million a year on UK road transport. We estimate that the impact of these extra fuel taxes compared to what will be paid if located in continental Europe is some £10 million a year, which is very significant. It is some £1,500 for every person they are making redundant as a result of their lack of competitiveness, yet you have come along to this Committee in a very complacent mode, if I may say so, when there is a crisis in manufacturing which is being exacerbated by this government's policy of having the highest fuel taxes in Europe.
  (Mr Hain) I am not at all complacent. I will ask Stephen to add anything he wishes on this matter but I also quoted to you the fact that, for iron and steel, the equivalent figure of fuel costs compared with overall output is 0.5 per cent. I do not think CORUS have suggested that their redundancies are due to rising petrol or diesel prices.

  433. They suggested it as one of the factors.
  (Mr Hain) But I think you would accept that, given the facts show that it is 0.5 per cent of their overall output, it has to be seen against a background of other matters including the exchange rate and including the world glut in steel and so on, so I accept the point that you wish to make from a party political point of view but I do not agree at all that this is a complacent statement about manufacturing. It is simply saying that we need to put it into perspective and I think the facts speak for themselves.

  434. You accept the £10 million extra for CORUS? You accept the extra burden on CORUS compared with what it would be if they operated in continental Europe, just on this issue of fuel? That is a significant sum of money for any business, particularly one under a tremendous amount of pressure?
  (Mr Hain) Of course I accept that CORUS have given these figures, and I am not in a position to dispute it, but you need to look at the £10 million against the 0.5 per cent of their total output and ask how significant a factor that was in both the redundancies they announced the other week and in their overall competitive position. I suggest that, when you do that, it has to be put in proportion. That is the point I am making.
  (Mr Timms) I would add to that, of course, that you need to look at the other taxes that companies in the UK pay, for example, the fact that we have the lowest rate of corporation tax amongst major competitor countries. The overall point, therefore, that Peter rightly made is that the overall tax burden for hauliers and others in the UK but hauliers in particular is not very significantly different from the overall burden by hauliers in other countries. It is the case, however, of course, that we have been working very closely with the haulage industry over the past couple of years. The Road Haulage Forum has been running for almost two years now, bringing together ministers from the DTI, from the Treasury—I am the Treasury minister on that forum—chaired by Lord Macdonald at the DETR. We have been looking very closely with the industry at the challenges that it faces and the competitiveness issues that they have been raising, and that is the background to the very substantial package of measures that the Chancellor announced in the pre budget report in November—the freeze on fuel duty; the reduction in duty on ultra low sulphur diesel, subject to what happens on ultra low sulphur petrol; the lorry VED reform; the refunds of lorry VED which have already been paid since November ; and a ring-fenced fund to assist the development of the industry in the future. So the government certainly has not been complacent on these issues at all but we have taken very substantial steps in the pre budget report to address the industry's concerns.

  435. And you think you have gone as far as the industry needs?
  (Mr Timms) The industry has very warmly welcomed the package of measures that the Chancellor announced in November. Hauliers I have spoken to have welcomed it very warmly.
  (Mr Hain) Can I add perhaps that I notice that the Opposition did not ask for more than 3p off the duty which is exactly what the Chancellor promised in his pre budget report. So I have not seen any clamour for a higher rate of duty reduction to come from the Opposition, unless the hon member is suggesting it now.

  Mr Chope: I think, for the record, we said a minimum of 3p off. When we get into government, we will see what that will be!


  436. Just to clarify the issue here, you quoted quite recently the evidence we received from the CBI. Does the DTI have a mechanism whereby it monitors the impact of fuel duty, of transport costs on across the board of industry, or does it just depend upon the figures which are provided from time to time by organisations like the CBI to committees like this? Is there a regular information-gathering process within the DTI so that the impact of fuel duty on industry, if it is deleterious, can be conveyed to the Treasury at the appropriate time so that the worst excesses can be avoided?
  (Mr Hain) We are in constant contact both with industry on a daily basis and with the Treasury naturally and, given the legitimate concern and anguish that there has been in some quarters about the massive increase in the world price of oil and the way that is fed through to domestic fuel prices, of course we are monitoring this all the time, and we are naturally concerned about it.

Helen Southworth

  437. Over a considerable period, I have been spending quite a lot of time with small businesses in meetings that I have set up or visits to business associations and lunch clubs and so on, and there have been three consistent messages creeping across. One is they need a stable economic environment in which to plan; the other is that they want government action to improve educational standards and skills levels; but the third one has been about transport. The important message is that small businesses see themselves as small businesses, getting on with the nitty gritty, and they want the government to act as their voice and be their champion on those three issues. Do you recognise that a stable economic environment is being threatened for very small businesses by the cost of fuel; that fuel taxation is a significant aspect of that for them; but that, most of all, what they are expecting is the government to act as champion in getting a stable environment for them in the cost of fuel?
  (Mr Hain) I do recognise—and Stephen might want to add to this—that fuel costs are an important factor, as I said to Roger earlier, in small business overall cost levels and, therefore, their profitability but I also agree with your point that a stable environment means not just macro economic stability but everything, including skill levels and fuel prices as well. Small businesses especially might not have access to, as it were, larger transport routes and mechanisms, as big companies do. We are very aware of this and that is one of the reasons why we have been pursuing the policy we have both in OPEC which has seen a reduction in the world price of oil down from the mid-30s to the mid-20s in terms of dollars per barrel, and also in our handling of fuel duty matters.
  (Mr Timms) I certainly recognise the issues you have given that small businesses are particularly concerned about, and the fact that we have achieved an unprecedented degree of stability in the economy in the last three years has been a particular boon to small businesses and across the economy more generally. There are, as you have said, concerns about fuel costs. The package I outlined a moment ago that the Chancellor announced in November does amount to 8p per litre for hauliers—a reduction of 3p directly on ULSD but adding the other measures up as well that comes to 8p per litre equivalent reduction for hauliers, so it is a very substantial contribution to reducing costs in an area, and I think it will be particularly welcome to small businesses. I think it is very important, however, in looking at these matters that the government does not take short-term knee-jerk measures which might appear to address a concern at the moment but which, if implemented, would jeopardise the very stability you have referred to as the biggest gain for small businesses in the last three or four years.

Ms Perham

  438. Much of the evidence which has been submitted to us indicates that the price of motor fuel is relatively "inelastic"—that wonderful economist term. Would you agree?
  (Mr Timms) We are confident that the effect of the fuel duty escalator has been to reduce significantly emissions and fuel use. I think probably the most powerful mechanism for that, though, has been encouraging people to use more fuel-efficient vehicles, and certainly the fuel duty provides incentives to that. Also, and it is interesting how seriously the haulage companies are taking this, it is encouraging professional drivers to drive in ways that are fuel-efficient. There is good evidence of the impact that driver training can have in helping people drive in a more fuel-efficient way and, thereby, save fuel. I think it is very clear. We think that by 2010 the effects of the fuel duty escalator as it has applied since 1996 will be to reduce the amount of CO2 emissions into the atmosphere by between 1 and 2.5 million tons, so it is a significant impact that we are able to observe on emissions.

  439. When you say "driver training", do you mean public information type material or what?
  (Mr Timms) No, I think haulage companies are paying more attention to how their drivers can drive vehicles in a way that is more fuel-efficient, and that is one of the issues we are looking at. I mentioned the ring-fenced fund, the £100 million fund over three years that was announced by the Chancellor in November to assist the industry addressing some of the current issues it faces and one of them is driver training. We are looking at whether we can help haulage drivers to be more efficient in the way they drive, to reduce their fuel consumption, and so reduce the costs that the companies are facing.

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