Select Committee on Northern Ireland Affairs Minutes of Evidence


Examination of Witnesses (Questions 1 - 19)

WEDNESDAY 31 OCTOBER 2001

MR JACK DUFFY, MR MATTHEW MURPHY, MR GORDON BEST, MR JEREMY ACHESON AND MR JOHN BAXTER

Chairman

  1. Good afternoon: thank you very much for coming. This is the first public session we are holding and taking evidence on the question of the aggregates levy. What is the current state of the market as far as the aggregates industry in Northern Ireland is concerned and how would this change if the levy were introduced in Northern Ireland next spring?

  (Mr Murphy) My name is Matthew Murphy from a small company in County Fermanagh called James Balfour and Sons. We are also a member of the Quarry Products Association. In broad terms the current state of the market is that we have a quarrying and associated industry in Northern Ireland which is fairly highly developed, employs in the region of 6,000 people directly, services all the construction needs, by and large, of Northern Ireland and the greater part of the construction needs of very many northerly counties in the Republic of Ireland. The quarrying and associated industry is probably more highly developed than our counterparts in the south of Ireland but in the last ten years due to various factors which have been changing they have begun to catch up. In broad terms now we would feel that in terms of competitiveness, the playing field is reasonably level. There are two areas in which they are more competitive than we; equally there are two areas in which we are more competitive than they. By and large we feel that the playing field is broadly level; we have good days and we have bad days. That is currently the state of play.

  2. What is the state of the market as opposed to the comparison between the two? Is it good times for your industry?
  (Mr Duffy) My name is Jack Duffy. I am Chairman of the Quarry Products Association Northern Ireland. I am also a director of Lagan Holdings. We are a family company and we operate in the Republic of Ireland as well as Northern Ireland. Over the past few years a substantial amount of quarry products such as concrete pipes, flags, kerbs, asphalt, have been exported into the south of Ireland. The companies along the border which would produce asphalt tender for contracts along the border counties: Louth, Cavan, Leitrim, Monaghan, Donegal, Sligo, Meath and West Meath. That relates just to asphalt. It is economical to draw asphalt that distance and they submit tenders to the county council for those contracts. The problem our members face at the moment is whether to put the £1.60 per tonne onto the aggregate and leave themselves in a non-competitive situation. Some of them are thinking at this stage, and we ourselves are thinking this way because we have a plant situated at Markethill which supplies asphalt to a number of these border counties—about 90 per cent of our production from that plant would go south of the border—

  3. When you say you operate both sides of the border, does that mean you are operating in the north but exporting into the Republic? Or do you have plants and quarries in the Republic as well?
  (Mr Duffy) We have plants and quarries in the Republic as well.

  4. Which would not be affected by the levy?
  (Mr Duffy) Which would not be affected by the levy, but we have two plants in the north of Ireland which would be affected by the levy, so much so that we have to look at alternative sites. If we relocate the two asphalt plants south of the border and haul the aggregate across the border, the aggregate is tax free, it is exempt. We can bring that into our coating plant and make it into asphalt and send it back into Northern Ireland again without paying tax.

  5. In my question I was not really asking about the impact of the levy but how the industry is. Are you on an upward trend?
  (Mr Murphy) We are a fairly mature industry. The establishment costs in our industry, unfortunately for those who are in it, are quite high. As long as we do not have any measures which put a spanner in the works we would be confident that our industry should continue long into the future to be a major employer in Northern Ireland. In direct answer to your question, if the current situation continues, we have no reason to see why there should be any risk to employment or the competitiveness that our industry has.

Mr Beggs

  6. In the original letter which came to the Committee it was indicated that the levy if introduced might endanger 4,000 jobs. We now have an update that up to 3,600 jobs would be affected. Can you quantify precisely the impact you expect the levy to have on the organisations you represent?
  (Mr Murphy) The company I represent is a small family company in Fermanagh. We have two product lines: one is asphalt and the other is dry stone. In terms of the legislation dry stone is categorised as virgin aggregate. If the tax goes ahead in its present form, in day to day terms the asphalt we manufacture will have a de facto tax on it in Fermanagh; whether it is sold in Northern Ireland or sold in the south that material will be taxed. Whether we are competing north or competing south we will be competing against asphalt which is manufactured in the south of Donegal, our nearest region in the Republic. Asphalt coming from southern Donegal, whether it is laid in Donegal or laid in Northern Ireland will not be taxed. We foresee that we will not be competitive in the asphalt industry if the tax goes ahead in its present form. We then will be faced with three choices: one choice is to go out of business or to slowly run our business down. We have two choices for survival: one is to pick up our asphalt plant and move it south of the border and in that situation we would continue to extract from the quarry we own in Fermanagh, we would transport material south of the border, we would turn it into asphalt there and we would bring it back again. That may sound like a bizarre situation which has arisen whereby we have increased our transport movements, we have transferred our jobs associated with value-added processing south of the border and we have not reduced our extraction at all. That is a very bizarre situation which the tax could produce. Another option we would have is to say we would stay where we are in our current location, but close our asphalt plant and in order to maintain our current level of activity, we would increase the rate at which we extract and sell virgin aggregate. In order to maintain our current level of business activity, we would have approximately to treble the amount of aggregate we quarry per year. Hence in that situation the tax will have forced us into greater extraction and through processing greater volumes we will also be forcing more lorry movements on the roads. The Committee should be aware that lorry movements account for the single biggest source of pollution that our industry is responsible for. I should just like to make that point in answering you. Whichever option we are faced with, unless it is closure, will actually provide environmental disbenefits for Northern Ireland.
  (Mr Best) May I just clarify for Mr Beggs where the 3,600 jobs come from? Gordon Best, Regional Development Manager for the Quarry Products Association Northern Ireland. There are 5,600 people employed directly and indirectly in the quarry industry in Northern Ireland.

Chairman

  7. What do you mean by indirectly?
  (Mr Best) Lorry drivers, sub-contractors, that type of thing.
  (Mr Duffy) It is approximately between 5,000 and 6,000 directly employed. When I say directly employed I mean on the payroll of companies who would be members of our Association. Companies who are not members of our Association would also be included in that. Associated workers would be hauliers, could be people supplying fuel to our industry, could be people supplying consumables such as bitumen or other supplies. There are many, many other employees in those kinds of support activities which we have not counted into our 6,000. Six thousand people are directly employed by companies like ourselves.
  (Mr Best) If you take North Down, Armagh, East Londonderry out of that, that is about 35 per cent and takes you down to 3,600. We have said there is probably a knock-on effect on small engineering companies which service many of the local quarries and many of those are family run businesses themselves. That is where we got the figure of 4,000 jobs which you have in your letter.

Mr Beggs

  8. In addition to the information which Mr Murphy has given us, do you have any further evidence that the imposition of the levy will prompt users of aggregates to source them elsewhere outside Northern Ireland?
  (Mr Murphy) We do not actually have documentary evidence with us, but customers of ours would have to like us very much in order to pay us £1.60 per tonne more than for a product they could obtain from elsewhere. At the risk of trivialising, and I do not mean to trivialise the answer to the question at all, we would feel that it would be a natural occurrence that people automatically wish to purchase the cheaper material, as they already do when they fill up their cars with petrol or diesel. People vote with their feet, drive south and fill up. We have no reason to think that when people are buying tarmac or buying concrete blocks to build a house they would want to pay more for those than they could pay for them if they come from south of the border.
  (Mr Best) The other point is that it could be not just on the dry aggregates, what we would term the virgin aggregates, to the layman that is just ordinary stone, but on the added-value products. What we will see happen after 1 April for example with government contracts around the border is southern companies awarded contracts able to import their asphalt, their black top into Northern Ireland tax free, whereas the producers in the north tendering for those contracts have to pay the £1.60 per tonne tax.
  (Mr Acheson) Douglas Acheson Limited. Our quarry is in South Armagh. As regards the sourcing of material from elsewhere, we have a customer who takes tens of thousands of tonnes throughout the year from us. They deliver a lot of material down into the south of Ireland and they are always coming up for a backload. They return via our quarry where they get loaded up and return to their own depot. If we had to pass the £1.60 per tonne levy on to the customer we would lose that business over night.

Mr Bellingham

  9. What percentage of the final processed product in Ulster is actually used in the south, exported south of the border?
  (Mr Murphy) It would vary, is the simple answer. In some industries we have had limited time and limited resources with which to be able to establish what the market situation is. We are talking about 18 months when we basically started from scratch. We have established that approximately one third of asphalt produced in Northern Ireland is exported; concrete blocks probably slightly less than that; we think that the percentage for pre-cast concrete is somewhere between 50 and 75 per cent.

Chairman

  10. Is that all exported to the Republic? Do you export any to Great Britain?
  (Mr Murphy) A very small percentage would be exported to Great Britain.

Mr Bellingham

  11. Give me the figure for the final processed product produced in the south. What percentage of that comes into Northern Ireland?
  (Mr Murphy) Insignificant. By virtue of the fact that our industry is more mature in the north than it is in the south, that status quo will not have any reason to change if the seesaw is not tipped in anybody's favour. If the seesaw is tipped in favour of southern producers, that situation is bound to change. If a measure like the aggregates tax is introduced, in terms of the thinking of business people it is more significant than currency fluctuation. In currency fluctuations you can have good days and bad days and nobody is going to move a major operation south of the border on the back of a currency fluctuation one day, but they will on the back of this legislation.

  12. Out of the jobs which the Quarry Products Association Northern Ireland would lose, how many do you think would be exported to the south if this aggregates levy goes ahead? Would you say half would go south or do you think it would be less than that? Demand is presumably going to remain static throughout the island.
  (Mr Murphy) Assuming demand remains static I should like to treat different sectors separately. Let us look at the market for concrete blocks. It is a very low profit margin product. The market price is £12 or £13 per tonne. Profit is about £1 per tonne. If you impose a tax of £1.60 per tonne on that, which you are not able to pass on to your client, you will probably cease block production. You will withdraw from the market altogether, in which case your counterpart in the south will increase his production or you move your operation south of the border. That is the situation with concrete blocks and the situation is similar but slightly different for other products. In terms of quantifying the percentage of employment which is going to move south, in the short space of time that we have been analysing the problem—and I would emphasise to the Committee that our resources and the time we have been able to spend investigating this problem are a lot less than the problem demands but I suspect that is a point we will move on to later—we believe 3,500 to 4,000 jobs are at risk, varying degrees of risk. The concrete block manufacturer will probably close down his operation overnight. At the other end of the scale, the product within our industry which has the highest profit margin would be the pre-cast concrete sector. This sector manufactures products like large concrete pipes or brick pavers, things like that. Northern Ireland is in the fortunate situation that it supplies around 75 per cent, somewhere in that area, of products throughout Ireland in that sector. You may think that if it has a high profit margin, it may be able to withstand the tax of £1.60 per tonne. I would make the point that a producer I know in Fermanagh, a neighbour of ours, produces high value concrete blocks, concrete pipes and other value-added products, exports them all over Ireland, but he consumes 200,000 tonnes of virgin aggregate in his aggregate every year. Multiply that by £1.60, that is £320,00 which will be added on to his bottom line. He employs 100 people. That is not a vast organisation but £320,000 year in, year out would be more than enough to force him to move south. Whether he can withstand the tax and still remain in business is one issue. Whether he is willing to in a place which will result in him carrying an overhead of £320,00 when he has an option to move south, I would regretfully say the answer to that question is probably trivial also.

Mr Bailey

  13. On the question of employment and possible relocation of either the actual extraction or processing aspects of it, has any estimate been done of cross-border migration of workers or commuting of workers to potentially relocated plant?
  (Mr Murphy) By and large the employment trends we are aware of are that the higher the salary, the further an employee will travel to his or her place of work. Unfortunately for various reasons the general salary prevailing in our industry is not the highest and we would not be expecting employees to travel more than ten miles. That is the current situation. If you wanted to do an analysis of where our companies' employees live, 90 per cent live within a 6-8 mile radius. Unless they were offered increased wages, we have no reason to believe they would want to move 20 miles away; certainly the salaries on offer in the industry would probably not be enough to compensate them for the additional journey. The additional employees needed to service any relocation to the south would probably come from the southern counties.

  14. In effect you would say that most of the existing employees in quarries or processing plants north of the border would opt for unemployment or alternative employment rather than go to the relocated plant.
  (Mr Murphy) It is difficult for us to say here and now what employees will do, but in terms of how far an employee will journey each day to his or her place of work, the general pattern in our industry is that it is not very far, owing to the fact that the average salary in relation to the national average salary is probably not very high.

  15. Some might.
  (Mr Murphy) Some might, indeed.

  16. You made a point which I am not sure I followed correctly. You implied that if this tax were levied some companies would compensate by raising their production levels. I was a little puzzled at that because I would have thought to a large extent in effect production levels were demand-led and there would not necessarily be an increase in demand. You might clarify that.

  If that did happen and there were an increase in production, you mentioned the transportation of the raw materials to an asphalt plant south of the border, that in itself might create some compensatory jobs.
  (Mr Murphy) It depends where the jobs come from. Increasingly hauliers in Northern Ireland are employed by Republic of Ireland companies. I am sure the Committee is probably aware that haulage rates, fuel rates and vehicle excise rates have for some years now been cheaper in the south. If you ask me whether I expect an increase in haulage operations to bring an increase in employment in the haulage industry, possibly it will. Will those jobs be northern based? I do not think so. You asked why it would be an option for a company like ourselves to maintain a current level of business by increasing production. The reason is that the aggregates tax divides the products our industry produces into two sectors: virgin aggregates and value-added products. For some reason the legislation allows for the export of virgin aggregate tax free, but it does not allow for the export of value-added products tax free. At a stage where for many years government agencies have been encouraging our industry to move as much possible into value-added processes, that is a difficult situation to understand, but that is the situation the legislation presents. We are faced with a situation where we have two product lines: one is a value-added product, asphalt. It will be taxed whether it is sold locally or sold into southern Ireland. In each market, north or south, it will be competing with our equivalent south of the border who will be able to sell his product untaxed. If you can appreciate that. We would expect the vast majority of tarmac and asphalt laid on the roads of Fermanagh either to come from a tarmac plant in southern Donegal owned by the Cement Roadstone Group or a tarmac plant in north Cavan. That is the situation we would expect in asphalt. In virgin aggregate, in terms of our company remaining competitive, we would still be competitive on a level playing field in exporting stone to the south of Ireland and in nominal terms selling stone in the local market. In nominal terms—and I stress nominal terms—virgin aggregates are tax neutral, that is those aggregates which are imported from southern Ireland into Northern Ireland are taxable. How easy it is going to be to collect that tax remains to be seen. The point I am making is that our only competitive product which we will be able to sell on a level footing with our competition south of the border will be virgin aggregate. In order for us to maintain our level of activity, we will have to decrease our profit margins slightly, gain more market share, which we have worked out probably will result in us trebling our extraction and sale of virgin aggregate mostly into the southern Irish market. As a result of an environmental tax, that is an appalling situation.

  17. Yes, but I am looking at it from the perspective of employment at this particular time. My last point is that judging from what you have said, in effect the extraction industry would be unlikely to move, but it would be the processing element of that that would be likely to move. Is that fair?
  (Mr Murphy) Yes, that is fair. Due to the fact that exports of value-added products are not exempted in the same way that exports of virgin aggregate are, it has created the bizarre situation where you can export virgin aggregate to a plant in the south and carry out your value-added process there. As in every industry the vast majority of jobs are involved in the value-added process, in some sectors you may have two, three, four people involved in extraction and maybe 20 or 25 involved in the value-added process, it is those jobs we are most concerned with.

  18. So a much lower proportion of people involved in extraction then than in processing.
  (Mr Murphy) Yes.

Mr Robinson

  19. I am required to register a new interest since our last meeting, that of the Northern Ireland Minister for the Department of Regional Development. That also requires me to record a specific interest in this inquiry in that that Department will have inescapable pressures of about £8 million additional as a result of the aggregates tax. May I follow on the issue of the impact of the tax? According to the 1999 census, there were about 4,740 people who were employed in the quarrying and concrete products industry in Northern Ireland. You are showing figures of about 3,600 jobs at risk. On the basis of your argument, the further you get away from the border, the less impact the aggregates tax has. You have defined 20 to 25 miles as being the area where it starts to have little or no impact in terms of the competition from the Irish Republic. If that is the case, are we saying that most of the quarries are within 20 to 25 miles of the border? What percentage would be in that area?
  (Mr Murphy) We have submitted a small visual which shows a map of Northern Ireland. On it there is a grey shaded area which shows the area of Northern Ireland which is within 20 miles of the border. That area covers approximately 50 per cent of Northern Ireland. If that area were extended to cover the area within 25 miles of the border, you would have approximately two thirds of Northern Ireland covered.


 
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