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.
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.
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.
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