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RHA submission advance of the Pre-Budget Report, 2009-10 Road
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 up-turn. 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 hauliers. • 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 taxation. 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 welcome. 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 vignette. 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 businesses. 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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