Examination of witnesses
Angela McGowan; Aidan Gough; Michael Bell; Declan Billington.
Q48 The Chairman: Good morning, ladies and gentlemen. We reconvene our second session of the House of Lords EU Select Committee, visiting Northern Ireland and then, tomorrow, the Irish Republic, in conjunction with the impact on both of Brexit issues. We are hugely grateful to you for sparing the time and always conscious that, in the world of industry, there are opportunity costs. We are very grateful for your time.
I notice, if not a skew, a certain emphasis, which, given the economic pattern of Northern Ireland, is entirely appropriate, towards the food and drink sector. I hope it may be reassuring to you to know that, on a quick headcount, three of our delegation are former Agriculture Ministers in London, of whom I am one. It would also be proper to declare formally my interest, which is on the register of interests in Westminster, as a farmer in the UK. While I do not have direct tradings with Northern Ireland, one knows enough about it to know how intimately connected these things are. If stuff gets a little cheaper, I am sure it will come our way from you, or vice versa, for example.
You are very welcome. This is a fact-finding inquiry. We are anxious to hear from you what is on your mind. The subtext is that we are anxious to know from you whether what is on your mind is also being conveyed effectively through Westminster in its negotiations. If we may, we will start, but perhaps, beginning with Angela, I might ask you to formally introduce yourself for the Committee.
The only other point I want to make is that you need not feel that each of you has to answer every question. I hope you can divvy it up among yourselves and we will keep moving in the hour we have, for which we are very grateful.
Angela McGowan: Good morning, everyone. As a bit of background about the CBI, we are a confederation of 140 trade associations. We are independent and non‑party‑political, in terms of our organisation. We are funded entirely by members across the UK. We speak for 190,000 businesses; that represents about a third of private sector employees.
In Northern Ireland, we represent a range of sectors—all sectors, actually—and a range of companies in terms of size and scale, and about two‑thirds of the top 100 companies in Northern Ireland. I should add that I have been in post for two weeks as the Northern Ireland retail director.
The Chairman: Congratulations.
Angela McGowan: Thank you very much. Before that, I worked for eight years as the chief economist for Danske Bank in Northern Ireland. It is one of the largest retail and business banks in Northern Ireland, if not the largest. I will now let my colleagues introduce themselves.
Aidan Gough: I am Aidan Gough, director of strategy at InterTradeIreland, which is the trade and business development body established in Belfast in the Good Friday agreement. Our remit is to promote cross‑border trade and business development. We have been doing that very successfully for this last 16 years or so. North-south and south‑north trade in total has grown exponentially; in fact, it has doubled since about 1996. We work primarily with small businesses, and cross‑border trade is particularly important for the small business economy. In fact, two‑thirds of Northern Ireland’s small firms’ exports go south of the border, so it is a vital market.
Declan Billington: I am currently chair of the Northern Ireland Food and Drink Association, and former chair of CBI Northern Ireland. I also sit in the Agricultural Industries Confederation in England, which is a UK‑wide body, as you will be glad to hear, looking at farm inputs: animal feed, crop sprays, et cetera. I have been in the chair of NIFDA for around four or five months. I defer to my colleague, Michael Bell, on the statistics of our trade body.
Michael Bell: First, thank you very much for the invite today and for the opportunity. I have worked in the agri‑food industry for some 32 years, 20 of those running the Northern Ireland Food and Drink Association, which is a private sector trade body covering about 110 food and drink manufacturers. We cover about 90% of the industry by turnover, and food and drink manufacturing is about 25% of our private sector by employment.
Q49 The Chairman: That is a serious factor. If you are happy, we will get straight on to the questions that we have in outline, with some follow‑up. I will ask the first. You will be aware, as he mentions it from time to time, that David Davis, the new Brexit Secretary, has made his first visit in that role to Belfast and has identified UK‑Irish issues, and specifically the impact on Northern Ireland, as one of the more difficult elements of the negotiation that are going to come up next year. From your point of view, what are the main difficulties that need to be addressed?
Angela McGowan: We would certainly concur with what David Davis has said. We see this as an extremely complex situation. I guess, if you want a quick summary, we have three points that we would see as the main difficulties. The first would be the future of the land border and the movement of goods and people across the island. The second would be securing access to EU markets. We are hugely dependent, in Northern Ireland, on the EU in terms of the proportion of exports: 52% of Northern Ireland exports go to the EU, and indeed 38% go to the Republic of Ireland. We are very dependent on this region for trade.
Thirdly, securing access to people is extremely important for us in Northern Ireland. This is a small economy in population terms, with a population of 1.8 million. We find a lot of young people go to university elsewhere and do not return, so the movement of people is very important for us and for many of our industries.
Declan Billington: If I can add to those comments, I agree with Angela. If we look at agriculture in Northern Ireland, it is part of an all-Island industry. The size and shape of the island is such that businesses have had to invest in assets to achieve economies of scale. As a result, for example, around 25% to 30% of the milk produced in the north travels to the south to be processed. Around 36% of the pigs slaughtered in Northern Ireland come from across the border in the south. In beef, there is a lot of trade south to north as well.
We are in a situation where the border is a faint grey line that, day to day, we do not pay much attention to. If we end up with a hard border, we will find assets stranded on one side of the border, maybe not achieving scale, and product on the other side of the border—animal livestock, et cetera—with restrictions, in that the assets are not available to process them to the scale that is needed.
The Chairman: There are supply chain problems.
Declan Billington: There is a whole supply chain problem. Northern Ireland also tends to be a little more exposed in terms of EU and international trade than the rest of the UK. The UK agri‑food market is largely servicing the domestic market. Northern Ireland, because of its proximity to the south, has a cross‑border trade of around £700 million of the £4.6 billion that we trade. We have another £400 million with the rest of Europe.
There is a slight wrinkle that I would draw the Committee’s attention to. In the nature of the industry, the consumer buys parts of animals, but you slaughter a whole animal. Although you may consider the trade with the rest of the world of around £140 million small, that is an income stream of product that you cannot otherwise sell. The UK market does not consume, for example, the offal we produce. If we lose access to international markets or some of the European markets, where we buy a whole animal, we may not be able to sell all the parts; therefore the profitability of the industry at a UK level and in Northern Ireland will decline.
The Chairman: I have two follow-ups to that, which are rather different in nature. One is the question of the machinery through which you are able to make your position clear. You are talking to us now, and we will no doubt reflect and report in due course, but we heard from the Secretary of State for Northern Ireland, James Brokenshire, the other day. He said that he had set up a new business forum, with particular reference to the agri‑food area, which he mentioned a number of times in his evidence. I wonder whether you see your lines of communication as being upwards through your Executive, across to Whitehall and Westminster, or to the European Union. Presumably, the answer will be all of those. It would be helpful if, at the beginning of this, you could indicate areas of blockage or difficulty that need attention before things are decided that may not quite suit your particular problems.
Angela McGowan: I will speak at a high level on that and then Declan will go into the specifics. We welcome the work the Secretary of State for Exiting the EU and the Secretary of State for Northern Ireland have done in terms of raising issues locally. Some core members of the CBI have been involved in the Business Advisory Group, giving evidence to him, so we have welcomed that. Both the NIO and the Executive have engaged heavily with the business community in recent months, but CBI members have expressed some concern that the Northern Ireland Office and the Executive have approached the issue of gathering information separately, and they would prefer to see a joined‑up approach between the NIO and the Executive on this.
Preferably, we would like to see more senior civil servants from the Northern Ireland Civil Service seconded to the Department for Exiting the EU, to provide on-the-spot guidance on issues that arise, particularly in relation to Northern Ireland. We feel that might help.
Additionally, we have observed that the Secretary of State, James Brokenshire, was reportedly excluded from the government Brexit negotiations. We and the CBI members would like to see the Secretary of State, if that happens to be the case, heavily involved within the government Brexit negotiations going forward.
Due to the structure of our economy and the presence of the land border, we are more vulnerable; we can talk through the economics of that later on. At the CBI, we believe that no decision should be taken on the UK’s future relationship with the EU without taking into account the impact on the people in Northern Ireland. I will let Declan go into the specifics.
Declan Billington: I sit on an advisory panel to the Ministers for the Department for the Economy and the Department of Agriculture, Environment and Rural Affairs. I was involved in a recent meeting with the Secretary of State. It is early days and there is a lot of dialogue. The anxiety that our members feel is that there are different groups having lots of conversations, and we are worried about a confusion of information arriving.
The other concern, of course, is about the key decision‑making departments for agriculture—first of all, the department dealing with Brexit. There are some points about trade negotiations at an EU level and in the international markets that our important to our industry, especially with our cross‑border trade. I suppose the challenge is how comfortable we feel that that is directly understood by the departments doing the negotiations.
Whatever the outcome of the negotiations, there will be a requirement to develop policy within the framework of a new way forward.
The Chairman: Including a domestic agricultural policy for Northern Ireland.
Declan Billington: Exactly, but remember that the agricultural policy for Northern Ireland will have many similarities with the agricultural policy in GB. The real question there is how we influence the shape and direction of that policy, because you would like it to be consistent at a UK level. The concern is that we are feeding in directly and we hope that those messages get to the people deciding policy and negotiation. There is anxiety over how comfortable we are that that is directly understood.
Aidan Gough: From a slightly different perspective, as you know, InterTradeIreland reports to both Governments through the Ministers for the Economy. The land border on the island, the extent of cross‑border trade, the fact that 53% of cross‑border trade is in agri‑food, which is itself a highly integrated all‑Island industry, and the east-west relationship, where there is £1.2 billion worth of trade between Ireland and the UK on a weekly basis, mean that this island as a whole is in a very special and difficult situation, faced with Brexit. We are speculating until we know what form Brexit will take, but the fact is that the island stands to be impacted greatly.
It is therefore vital that discussions happen between the north and the south, and we would welcome that, and between the east and the west.
The Chairman: I will ask a quite different question, which in a sense has become more current since we prepared our notes and our thoughts before coming out here. As you know, there has recently been some currency turbulence in the UK in relation to the exchange with other currencies, including the euro. There have been different currencies on this island since 1922 and the south now has the euro, of course. You have set out very helpfully to us the extent of north‑south trade, particularly in the agricultural and agri‑food sectors.
I wonder whether recent events create a qualitative problem for people, or whether they are hedged or used to this kind of thing, because it is not new. We are talking about changes in the political arrangements and potential market access, for example. Currency is a real issue now. I wonder to what extent people are used to handling that and whether that might be aggravated and become a political issue. For example, people in the south might say, “These people have let their currency go and we are not in a position to control our currency, because we are a part of a 19‑member‑state currency.” This could create difficulties for your counterparts and opposite numbers in the south.
You are nodding at me. Is this a real issue or something we do not need to worry about as much as some of the other issues at the moment? Angela, you have a finance background.
Angela McGowan: Everybody appreciates that huge fluctuations in currency are disruptive for most businesses and for investment purposes.
The Chairman: Including foreign direct investment.
Angela McGowan: Exactly, in terms of the price of their assets and where they see their investments going. I have had feedback from local companies. Some of them hedged, coming up to the referendum. Many of them, though, were starting to run out of that hedge; they had maybe hedged for only two or three months, and they could see, as that came to a close, that they would face much higher input costs. That is one of the main feedbacks we get in terms of the producer prices: that imports are much more expensive. Many companies wait for the largest player in the market to make the first move, and then they will follow suit in terms of raising prices afterwards.
Of course, as with any currency swing, there are winners and losers. At the moment, we can see some winners in the border areas, and Aidan might touch on that a wee bit further, certainly for things like retail. I am not sure it has come through yet in the tourism sector, but there are possibilities there. We do not see that as any great strength. It is a short‑term position and the reason for it is that we are in a strange limbo where we have the best of both worlds. We have a very low pound because people assume we are leaving the EU, but right now we have access to EU markets. In some ways, it helps with the exports, and it helps with cross‑border trade for now.
Businesses in the border areas are probably quite used to currency fluctuations. Aidan, you could give us a handle on that, as to how they have been coping historically, as opposed to currently, and on the issue for the Republic of Ireland.
Aidan Gough: It is interesting. You might think that, in an area such as Newry, shop‑owners and traders are rubbing their hands at the prospects in the short term. That is certainly the case, but it has been shown that these large swings and volatility do not address the structural problems in the border community; in fact, they exacerbate the problem on one side of the community, with the scales shifting to the other side. There may be short-term gains for northern retailers, but given that we do not know which way the exchange rate will go in the future, by and large, these fluctuations do not help address the structural problems in the border communities.
The Irish Government published a report late last week, which shows the impact of what they are calling a hard Brexit. Nobody knows what form Brexit will take, but a hard type of Brexit will disproportionately affect the border communities, because of the mix of sectors defined in those communities and the fact that they are predominanted by small and medium‑sized enterprises. There may be short-term gains for Northern Ireland, but taking the all-Island perspective, and on the whole it does not help address the problems in the border regions.
The Chairman: Thank you, we have noted that. If I may, I will come to you, Declan. Looking from the southern Irish perspective, it is interesting to see a story in today’s Guardian from a mushroom factory in Tipperary, which was closed in August. It exported 90% to the UK and was therefore entirely reliant on British sales. It closed with a loss of 75 jobs. That is an anecdote, but it is 75 jobs in the deep south of this island. Is that kind of thing already happening? Is it a worry that it might, and might it upset supply chains, because, to take Aidan’s point, people might not have any stability in their arrangements?
Declan Billington: As we know, agriculture is complicated. Going through the currency impact in the short term, if you happen to be exporting to the EU, it is good for you. If you are an importer, you have to get cost recovery into the UK market, which traditionally has been quite difficult. You will get it eventually, but you end up suffering squeezed margins until you can get it.
The south is very significantly exposed in its trading relationships with the UK. It has about a £4.4 billion export market, which is the UK market, largely dairy and red meat. It is significantly exposed because, in the UK market, its prices appear more expensive. This will squeeze its productive base. Given it has built a large proportion of the industry around the UK market, where else can it go?
The white meat, which is poultry and pork, is largely coming out of the Danish, German and Dutch markets. Again, at a UK level, we will see food costs rise as a result. The UK imports 42% of what it consumes. Even in the industries where we are strong—red meat, white meat, dairy—we import a quarter of what we consume. That will drive inflation. It would create an opportunity for the indigenous industries to expand over time, subject to various constraints, and meet some of that supply, so it is complicated.
There could be an opportunity for import substitution. Other businesses could see the benefits of export, but then they might start hitting tariff walls. Currency is useful up until the point when you exit Europe. We need to understand the trade deals that exist after that, because you may be competitive, but not if you cannot trade into the market you would be competitive in.
In summary, I believe there will be a significant challenge to the supply chain from the island of Ireland to the UK. On currency, it can be made even worse if we cannot resolve an all‑Ireland‑UK trading relationship. The UK industry can expand to take up some of the slack, but that is a structural change that could take some time to achieve.
The Chairman: Thank you. It is very useful to have your perspective. We will no doubt explore that further in Dublin, when we go there tomorrow.
Q50 Baroness Armstrong of Hill Top: I was going to ask you about the economy. You have already talked about that fairly fully. Is there anything else about the economic impact of Brexit that you think we need to take account of? You have already said that a lot depends on the nature of the terms we come to; nonetheless, do you have anything? We are particularly interested in what you think about Northern Ireland as a potential destination for foreign direct investment, and how you think that might be affected.
Angela McGowan: I should have mentioned, on the last point, that sterling has an impact on the migrant workforce. Europeans who have been working in the country find that they have less disposable income when they go back home. Some businesses fear that these migrant workers might prefer to live in the Republic of Ireland, so that they can maintain their standard of living.
The Chairman: Could this lead to labour shortages?
Angela McGowan: Yes. There is no hard statistical evidence around that now, but it had been mooted by some of the firms as one of their fears.
In terms of the economic implications and impacts, there are quite a few, but I will try to narrow it down to the main six. Foreign direct investment is clearly one of them. I will list them first; then we can go into the details. We see foreign direct investment being affected. Where an external investor could look at Northern Ireland and see access to half a billion consumers, now it has a much smaller market. That will make a difference. We see it lowering indigenous investment because of the uncertainty, and foreign direct investment because of access to markets. We see it restricting access to people as well. As I have said, we have a very small population in Northern Ireland and we rely heavily on the free flow and movement of labour.
For Northern Ireland, particularly in the short term, the depreciation of sterling will reduce incomes. There is no doubt about it: an 18% drop in the currency will in time feed through to households, which will place downward pressure on aggregate demand in the economy. We see it as slowing down the overall economy and GVA.
It is probably worth noting that Northern Ireland has lower disposable incomes, relative to the rest of the UK. When you erode incomes through a depreciation of the currency, there is a bigger impact in the local region. We spend more on energy, food and many of the things that rely on a good exchange rate. I have some figures from a report done by Oxford Economics and the Danske Bank forecasts. There is an expectation that this aggregate demand will play out and consumer spending will slow in the economy from 2.1% this year to about 1% in 2017-18.
Finally, there are of course huge trade implications for the economy. We have mentioned the cross-border issue. For us, the further away we are from the EU in that trade deal, the more negative economic effects it will have.
At this stage, it is worth exploring a few differences in the Northern Ireland economy relative to the UK economy. This is a small‑firm‑oriented economy; it is dominated by small firms. We are not a big exporting region as it is. Where companies take the leap and try to export, they tend to move into the Republic of Ireland; that is their first step. It is an English‑speaking region and has the same corporate governance, so it is easier. Aidan will probably want to talk about that further.
We are less engaged in exports, but also, I suppose because it is a small‑firm economy, we are less productive, hence the lower wages as well. Any slowdown in the economy hits us harder than it does the rest of the UK, because we are not as productive and we have these lower wages.
The trade is really significant, particularly our dependence on EU trade. I mentioned 38% of exports go to the ROI. In particular, we have a bigger manufacturing base than the rest of the UK; about 14% of our employment base is in manufacturing, while it is about 10%, I believe, in the UK. We have seen a decline in some manufacturers, but huge growth in the agri‑food manufacturing base. There are fears as to how Brexit will play out in that regard, given the progress we have been making over recent months.
I will let Declan come in. I was just going to mention that we had been pushing a policy for lower corporation tax so that we could compete more evenly with the Republic of Ireland. There are some fears as to whether that instrument could be blunted if we did not have good access to markets. Brexit certainly complicates the Executive’s efforts to grow the economy, in respect of what it had planned.
Declan Billington: Before joining agri‑food, I worked for an American multinational, running a manufacturing plant—an FDI facility—in Northern Ireland. Why was it in Northern Ireland? It was because of the combination of factors that made it a competitive production cost base, supplying product into the European market. Multinationals are, by their nature, mobile; they can pick up plant and move it anywhere. Going forward, the question is: post‑Brexit, what type of access will manufactured goods from manufacturing bases have here, versus the opportunities in, say, eastern Europe, which has always had a lower production cost?
The combination of skills and infrastructure still make Northern Ireland a very attractive place, and currency will continue to make it attractive, but the challenge for manufacturing is: it is here, on the doorstep of Europe, because it is inside a tariff wall. What are the consequences of being outside for manufacturing bases in Northern Ireland?
Moving on to agriculture, one of the challenges we have had as an industry is that the dialogue on Brexit, as we have heard today, is dialogue in siloes. What about the trade deals? What about rural support? What about the export markets? We commissioned a piece of work, which we hope to publish by the end of this month or at the start of next month, looking at all these factors and how they will impact on agri‑food. I would welcome an opportunity to table that to your Committee, because it is pulling together a holistic view, making observations and recommendations, not just about the types of trade deal but about the opportunities that exist and the need to have joined-up policy.
The reason I am going on about it is that a key element of what we did was surveying members. We had a lot of breakfast meetings with them to pull out that minutiae of information that helps us better understand the ripples.
Labour is a significant issue for us. Many years ago, we exhausted the ability to get local labour into our processing facilities. As a result, we are quite heavily dependent on non-UK labour. Some 60% of those working in our agri‑food factories are non‑UK nationals, many of whom have established families and their children are being raised here.
The Chairman: Those will typically be people who come from eastern Europe.
Declan Billington: Correct, and 90% of the seasonal labour we need, to handle the seasonality within our industry, is non‑UK labour. Any restrictions on access to labour, or any challenges to that labour workforce, could restrict our ability to stand still, never mind grow. The unique position of Northern Ireland is that, if we struggle to get access to labour—and we are businesses that run on an all‑Ireland economy—it is not unlikely that businesses would relocate their processing facilities across the border, where they will have free access to labour. That would not affect trade with the UK because the product is produced in Northern Ireland, minimally processed by labour in the south and sold on to the UK. That sort of event is still acceptable, in international trade deals, as being badged as UK.
The point is that, elsewhere in the UK, a labour shortage is a problem you have to address within the UK. In Northern Ireland, economics could well pull some of our business across the border.
The Chairman: If I can unpack that for a moment, to be clear, you were saying that there is a labour shortage in manufacturing, of conventional, manual and industrial workers, and in food, particularly in agri‑food; there may well be in other industries. You said you were reliant on imported labour, typically, although not exclusively, from eastern Europe.
At the moment, if someone is operating in Limerick, for the sake of argument, exactly those circumstances will arise. Do they also have to rely on imported labour, which of course, by definition, they will continue to get through freedom of movement, while you will not; or do they have adequate labour from their own sources, so the industry would move down there, irrespective of whether they had access?
Declan Billington: I am unclear as to the specifics of the labour employed in their agri‑food sector. I know they have had a significant inflow of non‑UK nationals over many years, to support a great deal of their industries—the service sector and the manufacturing sector. The way to look at it is perhaps this: there is no labour constraint to growing industry in the Republic of Ireland, because of the free movement of labour that exists. If you restrict us, labour becomes a significant constraint to our industry in the north.
The Chairman: Aidan, have you any comments?
Aidan Gough: Angela has picked up the key points. In terms of cross‑border trade, we are speculating a lot at the minute, because we do not know. What is very clear, and what businesses are telling us—because we survey over 1,000 businesses four times a year—is that they want to maintain a free movement of goods, services and labour on this island. That is the overwhelming message coming from the businesses we are involved with. We think that will give us the best opportunity to maintain the growth in cross‑border trade that has taken place over the past 16 to 20 years. That is to put it in fairly simple terms: anything less than that will have an impact.
Once you look into that, it will have a very differential impact. We are aware of the fact that agriculture is a critical issue on the island. If we move out of any sort of customs union, tariffs will come in. If we go to the WTO, the trade‑weighted EU average tariff is roughly 2.5%, but it is 22.5% for agriculture. It is vital that that sector be treated differently in a cross-border context.
The Chairman: We will now start examining some of those sectors.
Q51 Baroness Browning: Could you identify for us which sectors and industries you think will be most affected by Brexit? If there are any, which sectors will be minimally affected? I do not want you to rank them.
Angela McGowan: I should apologise to Baroness Armstrong, because I did not get on to FDI, but we can go back to that at a later point.
We move on to the sectors first. As an economist, I think it has the potential to hit all firms and sectors. You are looking at blanket implications for access to skills and overall demand in the economy. Also, as the economy slows, the inflation impact will hit household spending. For Northern Ireland in particular, food manufacturing, hospitality and universities will be very negatively impacted.
I will go through manufacturing first. For that sector, access to markets is huge, as is access to people, migrant workers and the free flow of talent, which is particularly important for pharmaceuticals—for example, for larger companies like Norbrook. The implications of a depreciated currency have a huge impact on the manufacturing base and even on the logistics of transporting goods around the place and moving workers.
The hospitality sector in Northern Ireland is also reliant on migrant workers, and local universities rely on the free flow of talent. A lot of the scientific and research staff in universities come from an EU background. They have a lot of fears around their funding. Access to Horizon 2020 grants, for example, is based on cross‑border collaboration.
The financial sector in Northern Ireland is nowhere near the size it is in the rest of the UK, but it will still be impacted if we do not have passporting and access to supply services across the EU. Most of the insurance for the Northern Ireland market is underwritten in Dublin. Construction has also been identified as a sector that is particularly sensitive to business investment. When it goes down, it impacts construction.
For agriculture, the issues are migrant workers; EU funding, which is very high for agriculture; and future exposure to tariffs, as we have mentioned. I will let Declan and Michael come in there.
The Chairman: Do you want to say a word about FDI?
Angela McGowan: Yes. In Northern Ireland, we have a history of punching above our weight in foreign direct investment. We have always done particularly well and credit should be given to Invest NI in that regard. Much of the employment growth since the crisis can be attributed to the very good foreign direct investment growth we have seen. It has always been a policy aim in Northern Ireland to attract foreign direct investment. For us, this is not just about creating jobs; it is about bringing into Northern Ireland companies that have high value added and come with good manufacturing practice and technology transfer. If we attract foreign direct investors, it helps to change the overall structure by bringing in larger firms, so small firms are not so dominant.
As you know, investors seek stability. With Brexit, obviously, the macroeconomic stability will not be there. We think that will affect foreign direct investment. It is about a number of things. I have here a list of the most influential factors that investors choose; it is a survey done by Ipsos MORI. There are about 12 different factors; when I go down them, about five of those factors will be negatively influenced by Brexit.
The Chairman: Perhaps you could share that with us via correspondence.
Angela McGowan: Certainly. Access to markets, political and economic stability, regulation and business taxation levels, ability to attract talent and exchange rate risk will all be negatively impacted. Five out of 12 is quite significant, so that is why we fear for foreign direct investment and our ability to attract it.
Michael Bell: Since 2008, Northern Ireland Food and Drink has almost doubled its turnover, which by any metric is very significant growth. We added about 4,000 in direct employment in food manufacturing over those eight years. The challenge for us, with Brexit, is how not to lose momentum. We are recognised in the programme for government; we are recognised by the Executive as being a significant contributor to rebalancing the Northern Ireland economy in terms of public and private sector employment. I make that contextual point.
I would also make the point that the average net‑net margin—these are DAERA figures, not mine—is about 3%. Generally, 2.7% to 3% is quoted as the average. We are looking at currency movement of 15% to 18%; we are looking at WTO tariffs across our principal parts, at today’s prices, of between 7% and 65%, so they are hugely significant. That is a set of challenges that we may face.
The last point I would make before handing over to my chairman, which has not been raised so far, is on standards. Currently, we operate to European standards across the agriculture and food piece entirely. I have not yet heard a discussion begin as to how the structure of whatever those standards are replaced with will be managed. If I look at the structures in the UK, if anything they are disaggregating, with the Scottish FSA leaving the UK FSA. I am concerned as to how, going forward, we will manage the standards that govern this industry.
The Chairman: Presumably, if nothing else, that is because of its trade implications.
Michael Bell: Yes.
Declan Billington: If I can pick up on that, 30% of Northern Irish production is directly subject to trade deals—the trade deals with the rest of the world and with Europe. The moment we exit Europe, we will have a 30% exposure if we do not get the trade deals in place. The international trade deals, the argument goes, should simply be rolled over, because they were acceptable to all parties when we were part of Europe, but they are quite important. That is £1.3 billion of our turnover at risk, unless we get trade deals.
The second issue to bear in mind is the history of Europe. It inserted significant tariff walls, within which it had a common market for agriproduce. It was able to layer social policy, environmental policy, animal welfare policy and disease policy on to the production base, which increased the cost, but it did so for all countries and production systems in Europe. A rising tide lifted all boats, protected by a tariff wall. When we step outside that tariff wall, the question to the UK Government is: if you hold dear the idea of environment, if you hold dear high‑quality, safe food, how will you continue to deliver those attributes?
Take the rural economy, which is heavily dependent on agricultural produce. Historically, agriculture was seen as a support mechanism to the rural economy. We have now confused production efficiency with policy cost. The big danger that our members see is that, in this confusion, we enter into trade deals for imports from countries such as Australia, where the tariffs keep them out. In countries such as New Zealand, they are on quota; if you take the quota away, it flows in. Countries such as Thailand and Brazil do not have a living wage. Are we going to invite them into our markets and expect an industry on which we have layered policy costs to compete?
One of the key challenges to the Government in the UK is to understand the cost of policy that has made the industry the size, shape and efficiency it is. How do you create a level playing field with imports that does not have us priced out of the marketplace?
The final question, of course, is transition. Because of the exposure to Europe that our industry has, we will have to repoint ourselves to different markets if we cannot continue to have tariff‑free access to Europe. Therefore, there needs to be transition for the industry. I believe we can transition; I believe there are opportunities. But, in that transition, will we lose a number of businesses on the way because we did not create a migrating infrastructure to support businesses as they reposition themselves?
Baroness Browning: Gentlemen, you have answered what was to be my supplementary question to that: the question of the dependence on CAP funding and the impact of WTO tariffs. You have also raised this question of standards. I jotted down “agricultural feeds, veterinary medicines, abattoir regulation, pesticides”. Looking at what you have described as the need to compete, whether domestically, within the existing EU or wherever, would it be a good idea if, in these negotiations, the UK Government were encouraged to at least mirror changes in these sorts of areas as they occur within the EU? If we start to slip behind, there will be a massive crash in consumer confidence and an impact for business.
Declan Billington: It goes beyond that. There is a thing called equivalence. When you want to trade in the world markets, you have to deliver a set of regulatory controls equivalent to the standard of the country that is importing. Not only do you need to agree that, but they will even send their vets over to inspect your enforcement of it. If, over time, we start to diverge from the standards that Europe drives, we may well find ourselves, if we have trade deals with Europe, losing them.
More importantly, the standards that were agreed with Europe underpin the 53 other trade deals that exist, which we want to roll over. You cannot roll over a trade deal and stand still on it if you start to move away from the standards underpinning it. Those standards are rolling standards, as the UK and those countries continue to improve.
Our industry sees a serious threat or risk in playing with the whole issue of hygiene and disease standards and walking away from the equivalence that exists in trade deals; and, therefore, those trade deals fall as a result.
Baroness Browning: I have a quick supplementary. This applies as much to England, Scotland and Wales as it does to Northern Ireland.
Declan Billington: Yes, it does.
Baroness Browning: I wonder if, in any recommendations to Government, we should be flagging this up as something that Government will have to prioritise. Agri‑food business is important not only in Northern Ireland but in every region of the UK.
The Chairman: As are other sectors, such as pharmaceuticals.
Declan Billington: Yes. There is a general principle that, if we want to trade in the world market and reposition the UK globally as a trading nation, we have to work to the world standards, which are the highest. In any market you want to compete in, you have to find the highest standards in the market and work to them, even if all other countries do not.
The great anxiety my members have is that we have some of the best animal welfare, environmental, food safety and food quality protections. Underpinning all that have been the regulations and the costs. How comfortable can we be about the equivalence of the imports we bring in? America uses hormones in its beef; that is one of the reasons why TTIP has not moved forward on imports. There is the issue of unapproved GM that Europe will not accept. There is a whole issue about things such as social policy and wages. We cannot compete to a standard expected of local production where we accept a much lower standard from the supply chain coming in. There are ways to manage it.
Baroness Browning: We heard in an earlier session this morning that, although Northern Ireland voted overall to remain, one group of people who were rather keen to leave, because of regulations, were the farming community. How, in Northern Ireland, are you going to sell what we have just been talking about to the farming community and explain that what we have just discussed is in their best interests?
Declan Billington: The issue is that there is good regulation and bad regulation. European principles I think we would all agree with. The application of regulation to deliver them has been quite poor, to my mind, in that it has been gold‑plated and made more onerous than necessary. The president of the farmers union said it is a debate of hearts and minds. Regulation was the issue that drove them away, but there is this challenge that Europe supports us. That is what the mind says, but the heart says we could do a better job if we had some freedom to move forwards. It is a challenge, but if we form more pragmatic regulations, delivering the same standards without the gold‑plating, we could win the farming base over.
The Chairman: I am going to compress our programme slightly now. Those have been valuable exchanges. I am going to skip straight on to Lord Whitty, with his question about the impact of Brexit on the trading relationship generally. We are scheduled to end in seven or eight minutes. If you would allow us five minutes so we can get a bit more in, it would be very helpful.
Q52 Lord Whitty: We have been hearing that Northern Ireland’s voice needs to be heard, but what would it be asking for in relation to trading relationships? Is there a specific outcome that would have a unified voice of Northern Ireland arguing for it? What would that look like? Does it involve some exceptional, bespoke agreements, with part of the agreement relating to Northern Ireland? What does business in Northern Ireland see as the optimal outcome, given the circumstances?
Declan Billington: We carried out a survey of our membership asking what it wanted. Number one in terms of access to markets was the European market. That is because it already has well established trading within Europe, and any disruption to that could be very damaging. When you look at the trade we do, much of the European trade is all‑Ireland trade. From that point of view, we are looking at a special solution for a special location. We know we are the only land border between the UK and Europe; Europe has other land borders, but we have a legacy of problems here. However, the all-Ireland market, the prosperity underpinning peace, has been a great success in making the border a pale shade.
Above everything else, our industry is looking for a continuation of the status quo, which is free movement of people and goods across the island of Ireland. That may not be possible, because the counterparty to those wishes is Europe, but we need to find an all-Island solution that enables us to continue with the all‑Island economy that we have. I cannot define how you do that, but the principle of it is strongly engrained within our memories: that we continue, in some shape or form, with the relationships that exist. One thing I would table is the concept of quota as a solution to trade, east‑west and north‑south.
The Chairman: Store that thought. Angela, do you want to come in on this.
Angela McGowan: Yes, very quickly. We can submit evidence to you, but the CBI has had consultation with over 500 businesses, and we have key asks. We can submit more detail later, but I will briefly highlight six of the key asks: maintaining ease of access to EU and UK trade; balancing, as Baroness Browning mentioned, the regulatory equivalence with the EU against flexibility and influence over the domestic environment; ensuring the UK’s migration system allows companies to access the people and skills they need, while recognising the public concerns; developing a very clear strategy for international trade and economic agreements; protecting the economic and social benefits of EU‑funded projects; and, specifically for Northern Ireland, keeping the barriers to labour, goods, energy and services across the island of Ireland as low as possible.
The Chairman: I will ask Lord Jay to come in now with questions, some of them more technical, about the border arrangements.
Q53 Lord Jay of Ewelme: You have talked a little about the importance of a soft border or maintaining the existing border—not having a hard border. Assuming for a moment that we leave the customs union and therefore it becomes the external border, can you see ways in which that could be managed electronically, by selective tests on either side of the border, and not by some kind of hard border? I guess that is for Mr Gough.
Aidan Gough: To be very clear, InterTradeIreland is an implementation body, not a policy body. We are there to make sure that, whatever arrangements are agreed, we can assist businesses to navigate those new trading relationships. It is very clear from talking to businesses that they want to retain free movement, so a physical border and border checks would be seen by the business community as detrimental, for obvious reasons.
I do not know at the minute, but, if they go down the road of exiting the customs union, some innovative thought has to be given to technology systems that will alleviate any impact of a physical border. You also have rules on origin to consider. At the minute, I cannot see how there will not be some checks.
Declan Billington: We have wrestled with this one, because it is quite difficult. We come to the answer that quota may well be a solution here. Traditionally, quota happens when there are legacy agreements, usually with Commonwealth countries and Europe, when they arrive into Europe and keep some of these legacy trade deals. There is no reason why we cannot have legacy trade deals when we exit, on the basis of quota.
The Chairman: A tariff‑free quota?
Declan Billington: A tariff-free quota: north-south, east-west, whatever. The scale of that quota would be small against the scale of all European agri‑food or, indeed, UK‑Europe trade, because Ireland is quite a small part of Europe. I can see how a quota might work north‑south, east‑west.
Having set quota, how hard do you need to police and inspect transactions cross‑border? You normally police them to make sure duty is paid, but, with a sizeable quota, why on earth would you then need to micromanage trade? You would end up putting electronic systems in place, using and auditing statistics to satisfy yourself that the quota was working as described, with a light touch in terms of the policing of trade, because quota means no financial loss or abuse can happen.
Lord Jay of Ewelme: That is very interesting, thank you. I guess there would be some leakage, but presumably there already is a certain amount.
The Chairman: It is a historical fact.
Declan Billington: There is always leakage, but consider the alternatives. If you have tariffs in the UK and the Republic has to export into the UK, historically there was export relief, and you will find animals being brought round the border three or four times to make the money. Those sorts of things do not work. If you reach the ceiling of quota and then see smuggling happening, to move animals north, it is risk and reward. First of all, what is it worth? The differential is the tariff that the UK has set. What is the UK going to set?
There are a lot of uncertainties here, but if you size quota correctly you can maintain the status quo and have a light touch, at least for a number of years.
Q54 Lord Selkirk of Douglas: Can I ask about the Treasury funding guarantees that I understand have been made quite recently? How would you assess the likely economic impact on Northern Ireland and border regions in particular of the loss of EU funding? To what extent will it be mitigated by the Treasury guarantees to make up the amount?
Declan Billington: Treasury guarantees only go to 2020. At that point, the whole CAP reform would be up for review, because it is 2014‑2020. What surprises me about the guarantee, I suppose, is that, having submitted our arrangements with Europe to 2020, I would have thought that we were satisfied with the economic justification of what we are doing, so he is guaranteeing something we already decided we wanted to do in the first place.
Post-2020, it is unclear. Given that 87% of farm income in Northern Ireland comes from the single farm payment, the real question is not that you wake up in 2020 and decide what you are going to do; in 2017 and 2018, you want clarity about what the world will look like in five years’ time. That is why we need clarity around policy, about what we intend to do to support the rural economy, what role agriculture has, because farmers will not invest in the future if it is unclear, and policy needs to tell us where we want to go.
The Chairman: Aidan, I would like to get you in with reference partly to the cross‑border capital investment side and the nature of Government undertakings, as well as the current situation.
Aidan Gough: There are two important aspects. First, we know from our surveys of businesses that nearly a quarter of them have already decreased their investment plans on the back of the referendum result, which will have a substantial impact, and that is to do with the uncertainty that surrounds it.
There is an important sector that we have not mentioned, which will require substantial investment, which is the energy market. I am not an expert in the energy market, but we know that Northern Ireland depends for its energy supply on the all-Island energy market. That requires substantial investment over the next few years, so there are critical issues here that still have to be addressed. Again, it emphasises the point that the impact of Brexit on the island, in Northern Ireland and Ireland, is different and disproportionate.
The Chairman: Angela, perhaps you would like to have the last word.
Angela McGowan: It is very important to stress the positive impact that EU funding has had on this economy over the past few decades, when it comes to things like infrastructure, agriculture, the peace and reconciliation fund, structural funds, the help to bring us out of Objective 1 status and university funding. We have welcomed the Chancellor’s recent announcement, confirming that they would honour the funding up to 2020, but we feel that key decisions need to be made regarding how existing funding programmes will be replaced when Britain leaves the EU.
There are small things. A proportion of the Executive’s investment in apprenticeships is underpinned by European social funding. We have flagship infrastructure projects that are dependent on it. I think the York Street interchange is 40% funded by Europe. We would like some clarity as to what happens after 2020.
The scale of the current EU funding should be noted as well. On average, between 2014 and 2020, current EU programmes deliver £144 million per annum to Northern Ireland, so it is a really significant level of funding and we would like some clarity on it going forward.
Q55 The Chairman: We are coming to the end of our formal session. Before I close it, can I ask the panel if there is anything that you would like to flag up with us that we have not mentioned? One I am conscious of is that while all capital may be slightly mobile, fisheries is even more so. I realise the importance of the fisheries sector, but we can perhaps explore that on another occasion. Is there anything else that you would like to mention to us?
Declan Billington: The conversation today has again been about certain areas of Brexit and we need to take an overview. In agri‑food, we believe, pragmatically, in getting the right outcomes to negotiation. I am not being naive. A £5 billion deficit will appear in the CAP if the UK does not pay into it. How will Europe view that deficit when we want to trade in agri‑food? There are certain consequences to that. Regardless of that, we believe there is a way forward for the industry; we believe the industry can grow, but it requires joined‑up government, joined‑up thinking and striking a balance between tariffs and policy and support mechanisms.
We believe the UK can be an anchor customer for our industry; we are supplying only three‑quarters of the market, but a slight quirk of the whole thing is that we could grow our international markets on the back of servicing the domestic market. That will be covered in the paper we will be producing shortly. It is not all negative. It can work, but we need to have the knowledge from those negotiating about what the endgame could be for agriculture and policy and negotiation, working together to create a positive framework going forward.
Aidan Gough: A question was asked about specific sectors. The Irish Government have identified five specific sectors that will be impacted. Food and beverages—agriculture—is obviously one, but you have pharmachem, which is largely east‑west trade, and traditional manufacturing sectors, materials and electric. They have highlighted those specific sectors and think that up to 94,000 jobs are at risk. Looking not in terms of sectors, it is primarily small, indigenous exporters, located outside the Dublin area in rural communities and specifically in the border area. Of those five sectors, four are also key ones in Northern Ireland and will likely be affected.
The Chairman: Thank you. On that note, you can take it as read that this Committee will take very seriously implications in the here and now for jobs and, of course, stability and security, which are important issues and go wider than the discussion we have had this morning. The whole Committee has found what you have said very helpful and illuminating in picking out the areas of concern and looking proactively at ways in which they might be met according to the unfolding negotiations.
In thanking you, I would just say that, in one or two cases, you have kindly undertaken to provide material for us. Declan is preparing a paper as we speak and I am sure, if you could share that with us, it would be helpful. Please feel this is a continuing dialogue. Whatever happens, as a Committee, we are likely to be very engaged in the whole process of negotiation, albeit at a distance, as you are. We would like that to go as well as it practically can. We are grateful for your time this morning and look forward to further contact, as and when appropriate. Thank you very much.
