RHA submission advance of the Pre-Budget Report, 2009-10 Road by fdjerue7eeu


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									             RHA submission advance of the Pre-Budget Report, 2009-10

Road haulage and the recession; the impact of the 12% increase in diesel duty

1.   The key issue in the current recession is how road haulage firms can survive what may
     be a prolonged downturn and the extent to which the sector can remain vibrant,
     competitive, and able to invest in the future. The industry is proving remarkably resilient
     and demand and supply must eventually come into line. But there are worrying signs
     that pressure on haulage rates, curtailed bank lending and rising costs are threatening
     many firms and compromising the ability of the industry as a whole to respond to any

2.   It is well known that increases in diesel duty generate hostility among road haulage and
     logistics firms; that has been detailed on many occasions by the RHA to officials and
     Treasury ministers in meetings and in written submissions. The UK has by far the
     highest level of road haulage fuel duty in the EU – that remains the case, even allowing
     for the decline in the value of the pound against the euro.

3.   Given the challenge faced by the public finances, a degree of increase in fuel duty was
     not unexpected by the industry, unwelcome though the prospect was. However, the
     rapidity with which the Treasury has driven up diesel duty in the depths of a severe
     recession has both shocked and surprised the industry. Car users may be largely
     unaware of the changes but road hauliers are acutely aware that diesel duty rose by
     12% in just nine months, from 50.35 pence a litre to 56.19 pence a litre.

4.   Diesel duty is no small matter. It is a major cost – and one that must be paid up front,
     with severe implications for cash flow. When we met with DfT officials, we explained
     that the impact of the inflationary hikes in duty would be to add more than 2% to the
     total operating cost of a typical articulated truck; and that diesel duty alone accounted
     for 20.7% of total operating costs (RHA Cost Tables).

5.   In effect, diesel duty is therefore a 25% tax on road haulage. To handicap the UK
     economy with such a tax on “the dominant mode of freight transport for the foreseeable
     future” (DfT) is, to us, to weaken the transport industry and to reduce the
     competitiveness of the UK economy as a whole.

6.   A typical 44-tonne truck now generates more than £24,000 a year in fuel duty, an
     increase of £2,500 on a year ago. To a transport contractor paying duty 90 days before
     payment by his customer – which is not untypical – that means he must lay out £6,000
     to cover the impact on his cash flow of the duty alone. The duty hikes since last
     November have added more than £500 per truck to this burden. No other sector of the
     economy has faced such an assault by the government on its costs and cash flow
     during the current recession.

                                                     Road Haulage Association Limited

                                                     Roadway House, 35 Monument Hill, Weybridge, Surrey KT13 8RN
                                                     Tel: +44 (0)1932 841515             Fax: +44 (0)1932 852516

                                                     Chief Executive: Geoff Dunning FCILT MIOTA

                                                     Registered in England No. 391886             www.rha.uk.net
7.    As has been widely accepted, the increases in duty have come at a time when banks
      have been reluctant to increase borrowing to SMEs in general; and in road haulage
      they have often cut their lending to firms.

8.    Cash flow has suffered as fuel suppliers have sought to minimise risk from the sector.
      This, we are told by the oil industry, is in part because they are unable to claim back
      duty (as opposed to VAT) if a customer defaults. That means that the credit risk to
      diesel suppliers is around three times greater than it would be on the fuel alone
      (depending on the commodity price of diesel). In addition, third party credit risk
      insurers, accounting for half the credit risk insurance in the commercial diesel market
      (the other half being self-insurance by the oil companies) took flight. Fuel suppliers
      have slashed already tight credit terms and many hauliers have to pay up front – before
      the diesel is delivered.

9.    At the end of January, a survey of RHA members revealed that 20% were having
      “serious difficulties” with their banks and 25% struggled to get credit from consumables
      suppliers. The majority of firms said customers were taking significantly longer to pay
      their bills. More recent surveys have indicated that the credit squeeze has worsened.

10.   The Treasury’s answer to the crisis appears to be “pass on any increase in fuel costs”.
      To some extent, it is a reasonable point to make. Very many RHA members seek to
      include a variable diesel cost element to their haulage rates. The RHA advises
      members to do this and explains how it might be done; and we campaign for customers
      to recognise the pressures on haulage costs and to pay a sustainable haulage rate.
      Perhaps Treasury ministers might care to take up our invitation to support the industry
      and urge shippers to pay necessary haulage rate increases.

11.   In truth, some hauliers succeed in passing on diesel cost increases. But it is also true
      that there has been increasing resistance from customers to such increases. And many
      of those firms that pass on diesel cost increases are unable to get rate increases to
      cover any other area of cost increase, for example in truck prices and in staff training.

12.   This autumn, the managing director of DAF Trucks, the UK market leader, was quoted
      as saying that sales of trucks in 2009 will be at an all-time low. Even more worryingly,
      he says that 2010 will be little better. He has confirmed the accuracy of the report. His
      comments need to be put into context. To put this in context, the last truck sales slump
      – in 1991 – came after several years of record sales. There was therefore a significant
      element of truck market adjustment, quite apart from the impact of the recession at that
      time. There is little in the way of an adjustment factor in the current market. Sales levels
      have been remarkably level in recent years at around the long-term average.

13.   The slump in sales this year truly is a reflection of the impact of the recession and the
      credit slump. The market is being propped up by buyers such as supermarkets and
      other major retailers and such firms as are in a position to pay cash – perhaps cash
      from manufacturers who are having to take back trucks on non-discretionary buy-back
      arrangements. DAF’s prediction reflects a combination of an unwillingness to invest in
      new vehicles and an inability to do so, which we understand is also being felt by other
      equipment suppliers, such as trailer manufacturers. Should the Department for
      Transport decide to allow longer lorries by increasing the permitted length of semi-
      trailers, that will put large sectors of the industry at a serious competitive disadvantage,
      as they will be required quickly to provide the longer trailers but have neither the
      confidence nor the financial ability to respond.
14.   DfT statistics on road haulage activity show a decline in the third quarter of 7%, year on
      year. This followed a 9% decline in the second quarter and a 12% decline in the first
      quarter. It is likely that the greater burden of reduction has fallen on the hire or reward
      sector – own account operators, carrying their own goods, will normally choose to stop
      using hauliers rather than stop running their own trucks during a downturn. That
      analysis is supported by the degree of reduction in UK-Continental traffic, which hit
      19% downturn earlier this year.

15.   The impact on the broader economy of increases in road fuel duty also gives cause for
      concern. HMRC tells us that last year (2008) road fuel duty receipts (petrol and diesel)
      reached £24.6 billion. On a like-for-like basis, the 12% increases in duty levels give
      additional burden to the economy amounting to almost £3 billion, of which around one
      quarter will fall on HGV operators.

16.   Ministers have told us that they wish to see a healthy and competitive road haulage
      sector in the UK. However, they must have an idea as to how this can be achieved. In
      our view, a degree of diversity is required and current policy appears to us to be
      working against that objective.

17.   Every duty increase amounts to an invitation for hard-pressed customers to look to
      changing supplier. It increases the barrier to entry into the profession – and we have
      seen a worrying decline in the number of new O-licence applications; and it makes it
      increasingly hard for many firms to respond to any increase in demand for their
      services. That is especially true when banks are reluctant to lend.

18.   In the light of this evidence, we urge the Chancellor to:

      •    Abandon the inflationary increase in fuel duty planned for spring 2010.
      •    Devise a mechanism for stabilising the duty rate paid by licensed road
      •    Implement measures to reduce the cash flow burden of fuel duty, which
           currently amounts to a 25% up-front tax on road haulage operation, such
           as: a 60-day deferment of duty payment by professional transport
           companies in the SME and micro-business sector; and allowing fuel
           suppliers to reclaim duty where a haulage customer defaults on payment.

Vehicle excise duty

19.   We note that VED rates on trucks have been held steady for most of the decade and
      this is welcome.

20.   We urge that this policy be continued, to maintain a broad parity with our
      competitors from abroad and to avoid unnecessary increases in business
De minimis payments – reversal of government policy a welcome first step

21.   In February 2009 the government allowed road haulage companies to receive
      assistance under EU de minimis rules for the first time – reversing a long-standing
      opposition to the inclusion of the sector in the scheme. Aid to road hauliers has been
      allowed under EU rules since 2008 (with restrictions, including the exclusion of aid for
      the acquisition of vehicles) but that facility had not been available in the UK, which had
      opposed the move during consultation (in 2006).

22.   The decision in February 2009 related specifically to the Enterprise Finance Guarantee
      scheme. It was made after robust representations from the RHA - we argued that
      hauliers should be treated in much the same way as firms in many other sectors of the
      economy – and immediately meant that banks could consider certain applications from
      RHA members for EFG funding which had initially been refused. This was clearly

23.   Of wider significance, it set a precedent for road haulage under de minimis which we
      look to influence future policy.

24.   The RHA notes acceptance of road haulage for assistance under EU de minimis
      rules for the first time. We view this as a positive step – one that recognises the
      value of haulage businesses and urges that further de minimis and other
      assistance be made available.

Eurovignette – foreign hauliers must pay their share

25.   In the light of new evidence, we urge ministers to review its decision not to apply a
      vignette charge on foreign operators. We have explained our concerns about the
      evidence that formed the basis for the decision in spring 2008 against introducing a

RPC scheme and incentives for cleaner emissions

26.   The Chancellor made a welcome commitment in his spring 2009 Budget to reviewing
      the reduced pollution scheme, by which VED reductions of up to £500 are made
      available for new trucks that are specified with Euro emissions standard ahead of the
      legal minimum EU requirement. We engage positively in this review. However, in the
      absence of Euro 6 trucks for at least two more years, the Treasury is, in effect, saving
      RPC payments with effect from October this year.

27.   We doubt if an easy substitute for Euro 6 can be found that would not prove to be
      disruptive in the truck market. EEV is not, we believe, the answer. Electric and hybrid
      vehicles are not yet sufficiently trusted.

28.   Biodiesel remains an area of uncertainty and we welcome the approach that taxation
      should be aimed at directing supplies into the mainstream, rather than incentivising
      fuels with a high percentage of biodiesel as a “boutique” fuel.

29.   One possible area of investment is in training, especially under the new Driver CPC.
30.   Any future incentives should be targeted especially at the SME and micro sector of the
      industry. There may be a place for publicly-funded trials of new technology that are fully
      publicised and reported, so that the operating industry and, importantly, potential
      funders can have a rounded view of the reliability and performance that can be
      expected from new technologies, giving equal opportunity to smaller businesses
      wherever possible.

31.   We urge that money saved from the ending of the Euro 5 RPC scheme be re-
      invested in the industry, with particular focus on assistance for SME and micro

Enforcement activities must be maintained

32.   Although primarily an issue for the Department for Transport, we stress to the Treasury
      the need to ensure that enforcement levels are maintained in respect of road haulage.
      The increased enforcement activity and budget in respect of high risk traffic, for which
      the RHA lobbied robustly in 2007/early 2008, is welcome and is making a difference,
      especially in respect of foreign trucks which provide unfair competition and are eight
      times more likely to be involved in serious crashes than UK trucks (DfT Impact
      Assessment on Graduated Fixed Penalty scheme). A further increase would be useful
      but at any rate there must be no weakening of effort; and where efficiencies can be
      gained, the savings should be re-invested in more effective enforcement, rather than
      taken as savings. Of all the DfT’s budgets related to road haulage, we see this as the
      most important to defend during the current search for cost-savings.

33.   We would urge that the Treasury recognise the importance of the DfT’s increased
      enforcement budget and stress that it be at least maintained at its current level.

Roads – fears for investment

34.   UK road capacity is woefully short of what is needed now and will be needed in the
      future. The government’s late 1990s commitment to reduce congestion levels has long
      since been abandoned and warnings of the impact on the economy of a failure to
      provide greater capacity have become evermore stark and more urgent since
      Eddington – not least in the light of new forecasts of population growth.

35.   Yet while we hear great emphasis on prestige-laden high speed rail projects and
      maintenance of overall transport spending, roads investment appears to be on the
      wrong track, with diminishing budgets for major schemes, minor schemes and
      maintenance of the existing network.

36.   We urge the Treasury strongly to maintain and to increase roads investment,
      without which the economy is unlikely to prosper.

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