Consultation on the revision of the European Union rules on regional state aid Food and Drink Industry Ireland Submission - April 2012
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Consultation on the revision of the European Union rules on
regional state aid
Food and Drink Industry Ireland Submission
April 2012
1. Introduction
Food and Drink Industry Ireland (FDII) is a business sector within IBEC representing the
interests of over 150 food and beverage companies representing 85% of the sector. The
agri-food sector is Ireland s most important indigenous sector with direct and indirect
employment of over 230,000 people and exports of almost 9bn in 2011. 75% of exports go
the EU with the balance to third countries
Some other key statistics and facts on the industry:
Turnover of 24bn
One in eight jobs in the economy
Exports to over 120 countries
Accounts for 2/3 of exports by indigenous manufacturing
Largest net exporter of dairy ingredients, beef and lamb in Europe
Largest payroll of any manufacturing sector
75% of raw materials and 50% of services sourced in Ireland
Ireland has a national agri-food strategy, Food Harvest 2020 which has a vision of smart,
green growth. Export growth of 40% is the central element that underpins Food Harvest
2020 and given the unique Irish economic footprint, this will impact on the wider economy
in a way that is not delivered by exports from any other sector.
Furthermore the targets for growth outlined in Food Harvest 2020 are based on medium to
long term increases in demand for Irish produced food and drink combined with a
competitive agri business supply capability in Ireland.
FDII welcomes the opportunity to make a submission to the public consultation. This
submission outlines a number of factors unique to Ireland and to the Irish food sector in
particular:
The economic issues that are unique to Ireland GNP is a more accurate measure of
the economy than GDP, one of a small number of countries in an EU/IMF
programme and the high absolute unemployment levels that pertain as a result of
structural rather than cyclical changes in the economy.
The specific and unique case of the Irish food sector 1 in 8 jobs in the Irish
economy linked to the sector, a need to remain close to a competitive raw material
supply base, a disruptive currency risk from the sterling zone which is Irelands largest
export market (Section 5.2).
These points must be taken account of when agreeing criteria to develop post 2013 regional
aid maps. This submission argues that significantly greater levels of aid intensity (up to 40%)
as determined by a regional aid map designed with more appropriate criteria will incentivise
the Irish industry achieve its full growth potential. This is turn will support Irish economic
recovery through job creation and also support food security within the European Union.
2. Employment Growth Potential
Direct expenditure1 by the food sector in the Irish economy is equivalent to almost 60% of
sales. This compares with 21% for the rest of manufacturing. Therefore every extra euro of
food exported is putting 60 cent at minimum2 back into the Irish economy:
This factor is hugely important in the context of addressing the very high levels of
unemployment in the Irish economy despite the growth in exports in the Modern Economy
sectors in 2010 and 2011.
Achieving the growth targets for Food Harvest 2020 particularly when the current
commodity price returns are backed up by increases in volume of production will deliver
40,000 jobs3 in the Irish economy.
This increase in employment will manifest itself across the economy and across the regions:
in farm supply, fertiliser and ingredients on farm and in new entrants to farming (dairy), in
distribution, collection, processing, sales and marketing and R&D across the sector and in
particular in the SME providers to the sector.
3. Barriers to growth
The Irish agri-food sector is characterised as a high capital cost sector with relatively low
margins over time .The primary processing sector for example in both meat and dairy
processing would show a 1-2 % net margin over time (Census of Industrial production
CSO).
The main barrier to developing a higher margin sector stems from Irelands unique
seasonality dependent production (high proportion of commodity products) and a very
small domestic market relative to the scale of production by a multiple of about ten to one
giving rise to an usually large dependence on exports- mainly commodity related products.
This set of circumstances places the Irish food industry in category equivalent to NZ in terms
of export dependence but burdened by an EU high cost of living and cost of production
structure.
1
Annual Business Survey of Economic Impact 2009, Forfas 2010 (Appendix D)
http://www.forfas.ie/publication/search.jsp?ft=/publications/2010/Title,7019,en.php
2
Direct expenditure only
3
Based on FDII research
This combination of high entry levels of capital investment and low returns requires medium
to long term financing facilities that are currently not available in the Irish economy. This is
exacerbated
rbated by overall lack of credit in the Irish economy (see next graph). This lack of
suitable finance restricts both the capability of existing processors to expand production
capacity and acts as a barrier to entry for new companies into the sector.
Thee EU commission recognised this challenging environment ( in effect a market failure) in
the past4 through the provision of processing grants for both Annex 1 and non-annex
non annex 1
(processed) sectors of the Agri industry.
Food and Drink Industry Ireland in this submission outlines the unique and very challenging
circumstances that Ireland finds itself in at present. Moreover, by European standards, the
agri-food Measures
food sector is a disproportionately large part of the economy. Meas ures to facilitate the
stimulation of growth in the agri food sector, in particular higher aid intensity levels, will
agri-food
have a hugely beneficial effect on the wider economy. This must be recognised in i the
revision of the regional aid guidelines.
sector- it s principal value added
The food sector is different from any other manufacturing sector
economy i.e. employment linkages / sub-supply
is in expenditure in the Irish e supply to the sector
rather than in profit margin(gross
margin( ross value added - GVA).
GVA
This contrast between
between the high levels of expenditure in the Irish economy / employment
linked with the sector and it s relatively low GVA rating has led to the food sector being
ranked in economic terms below sectors with high GVA rating but low expenditure / linked
employment in the Irish economy.
In econom expenditure
n addition to having a very significant linked employment and Irish economy
function the sector is also important in terms of food security,
function, security, ensuring population
4
European Agricultural Fund for Guidance and Guarantee (FEOGA)
nutrition, utilising the output of the agricultural sector and thus underpinning the wider
rural economy.
Its complex supply chain from farm to fork is both remarkably sensitive and resilient at the
same time. Moreover as a result of the combination of innovation and cost competitiveness
measures there is a greater capability in production/processing of value added materials.
These typically fall outside the scope of agricultural products listed in Annex 1 of the Treaty
and thus are not covered EC guidelines for state aid in the agriculture sector.
As mentioned above the economic profile of the sector is different to other manufacturing
sectors it is a stable industry with significant growth potential but low margins. The net
effect of this low long term return and high capital cost is that financing for investment and
expansion purposes is not as readily available as for other sectors. This absence of
commercial finance even in non-recessionary times has meant that over time specific state
resourced banking facilities were created State support has less of a market distorting effect
than would be the case where the state is competing with commercial finance providers
Thus in the case of agri-food, special consideration needs to be given to the appropriateness
of sectoral regional aid measures or perhaps even a block exemption rather than simply
relying on a completely horizontal approach to regional aid.
Over the following pages this submission will highlight a number of issues which are unique
either to Ireland or to the food sector and that if addressed when considering amendments
to the criteria used in the regional aid guidelines can deliver significant increases in
employment and value added to the Irish economy.
4. Economic Issues Unique to Ireland
4.1 GNP versus GDP
The existing Guidelines on Regional Aid for 2007 2013 utilises GDP per capita of each
region, as determined by the Statistical Office of the European Communities, when
determining the designation of regions eligible for regional aid derogations under Article
87(3)(a) of the Treaty. This disadvantages Ireland due to the large variance between GDP
and GNP.
Source: CSO
In 2011 Irish GDP was 26.3% larger than GNP. This is up from 21.7% in 2010 and is reflective
of the fact that GNP continues fall while GDP grows
grows marginally.
This large variance has been acknowledged by both the European Commission and the
OECD.
European Commission
"Two important factors should be noted when interpreting many of the usual
macroeconomic data series for Ireland, including those on productivity developments. First,
while economic growth is usually measured in terms of GDP, GN5I is probably a more
appropriate measure for the Irish economy. The difference between GDP and GNI is net
Ireland because of profit repatriations by
factor income, which is significantly negative in Ireland
multinationals. Irish GNI, which is about 20% smaller than GDP, is seen as a more suitable
indicator of Irish living standards (among EU countries, Luxembourg is the only other country
where the difference between the two measures is more than 10% of GDP). Second, some
sectors with a marked presence of multinational companies are likely to be characterised by
transfer pricing, attracted by Ireland s low tax rate on corporate profits. This has a
considerable impact on on standard measures of profits, output, productivity etc."
Source: Economic adjustment programme for Ireland February 2011
OECD
Ireland is another country where GDP has to be read with care. Ireland's position has risen
up the GDP per head rankings since 1999, and is now in the top five countries in the OECD.
This remarkable transformation has been put down to a mix of factors, of which inward
value added businesses is one. But does GDP per head accurately reflects
investment in high value-added
wealt h, since all that inward investment (and foreign labour) generates
Ireland s actual wealth,
profits and other revenues, some of which inevitably flows back to the countries of origin?
5
plus EU subsidies less EU taxes which in an Irish context is
GNI is almost identical to GNP. It is equal to GNP plus
worth less than 0.9% of GNP.
Another measure, Gross National Income, accounts for these flows in and out of the country.
For many countries, the flows tend to balance out, leaving little difference between GDP and
GNI. But not so for Ireland, as outflows of profits and income, largely from global business
giants located there, often exceed income flows back into the country. This means that in a
GNI ranking, rather than being in the top five, Ireland drops to 17th. In other words, while
Ireland produces a lot of income per inhabitant, GNI shows that less of it stays in the country
than GDP might suggest.
Source: OECD Observer.
Strong consideration should be given to allowing the use of more realistic GNP figures in
Ireland s case. Moreover the reference period needs to be as recent as possible in order to
accurately reflect the current situation in Ireland.
4.2 Absolute Unemployment Levels Caused by a Structural Change in the Economy
The current Guidelines on Regional Aid, in relation to the derogation in Article 87(3)(a), note
that aid to promote the economic development of areas .where there is serious
underemployment may be considered compatible with the common market6 but also note
that the selection criteria for eligible regions by member states include unemployment rates
which are 115% higher than the national average7. Since the current Guidelines were
drafted and published in 2005/2006 the unemployment situation for the EU as a whole and
more particularly certain member states such as Ireland has changed dramatically as the
following graph shows. However in Ireland s case the change is structural rather than
cyclical and these jobs are gone forever. The construction sector now employs about
107,600 people, down from 270,000 in 2007 at the peak of Irelands economic boom,
according to the Central Statistics Office. These jobs will not come back in construction and
this unemployed cohort has a skills base more suited to agri-food than the modern sector.
There is a solution to this country specific structural unemployment problem which is based
on the collapse of Irish construction. It lies in adequate support measures to boost agri-food
output in Ireland This can be achieved by allowing significantly greater levels of aid intensity
(up to 40%) as determined by a regional aid map designed with more appropriate criteria
which will allow the Irish industry achieve its full growth potential
6
OJ C 54, 4.3.2006 , p.15.
7
OJ C 54, 4.3.2006, p.18
Source: CSO
There is a strong case for the absolute unemployment rate to be considered as the measure
in Ireland s case and more generally for widespread intensifying
inte sifying of aid rates as part of
derogation measures to promote economic development and job creation in light of the
huge increase in the absolute unemployment rate in Ireland caused by structural rather
than cyclical changes in the economy
economy.
5. Remedying serious disturbance in the economy of a member state
5.1 Ireland is in a Financial Assistance Framework Programme (EC/ECB/IMF)
In 2009 the Commission in a Communication noted that the current global crisis requires
exceptional policy responses8 and cited Article 87(3)(b)
87(3)(b) of the Treaty that the Commission
may declare compatible with the common market aid to remedy a serious disturbance in
the economy of a Member State . In this context, the Court of First Instance of the European
Communities has ruled that the disturba nce must affect the whole of the economy of the
disturbance
Member State concerned, and not merely that of one of its regions or parts of its territory.
This, moreover, is in line with the need to interpret strictly any derogating provision such as
Article 87(3)(b) of the Treaty . This was the basis for the introduction by the Commission of
the Temporary Framework in 2008 which amongst other things allowed for an increase in
de minimus levels, state backed credit insurance etc.
9
The Commission produced a staff working paper
p in Oct 2011 which noted The Temporary
Framework of aid to the real economy complemented the framework put in place to allow a
take-up
swift and coordinated response during the crisis. Whilst its take up has been limited, it has
8
OJ C 14, 21.1.2009, p.4
9
DG Competition The effects of temporary State aid rules adopted in the context of the financial and
economic crisis Commission Staff Working Paper (October 2011)
been a useful safety net allowing for an emergency response during the crisis. Whilst its
take-up has been limited, it has been a useful safety net allowing for an emergency response
tailored to tackling the difficulties arising from financial turmoil
In Ireland s case, we continue to have serious disturbance in the economy as demonstrated
by the entry of the country into an EU/IMF Financial Assistance Programme in 2010.
Accordingly exceptional policy responses continue to be required and these should include
greater aid intensity levels in the Irish regional aid map in order to promote growth,
economic activity and job creation.
5.2 Currency Risk
Ireland is a member of the Eurozone but our biggest trading partner the UK is not and our
agri-food sector faces substantial currency risk from the sterling zone
42% of food and beverage exports go to the UK
50% of food imports come from the UK
A land border is shared with Northern Ireland which impacts on retail spending
choices during times of severe currency or taxation differentials
The 30% depreciation in value of Sterling versus the Euro in 2008/09 had a hugely
disruptive effect on the agri-food sector in Ireland.
Unlike other high per capita agri-food exporters in the EU (i.e. The Netherlands) our largest
exposure is outside the Eurozone. This resulted in a massive disruption to the internal
market in 2008/09 as UK businesses gained a massive competitive advantage. Countries in
the euro area have no defence against the sterling collapse. Ireland with its strong trading
links to the UK and its shared border remains particularly vulnerable and suffers
disproportionately more than other euro area members. The currency crisis of 2008/09 also
caused some structural changes in the Irish food supply chain. These have manifested
themselves through growing food imports see chart below.
Source: CSO
6. Irelands Food Industry Small, Medium and Large Companies
Ireland s food industry is a diverse mixture of companies that are small, medium and large
and located in all regions of the country as the following two graphics from the 2011 Annual
Agriculture, Fisheries and Food
Review and Outlook published by the Department of Agriculture,
demonstrates:Nevertheless the majority of exports are accounted for by large companies. The small
domestic market of 4.5m consumers requires companies with strong growth potential to
begin exporting at an early stage and in turn achieve scale to (i) lower unit costs through
higher capacity utilisation and (ii) efficiently service overseas markets.
The stark reality also is that consolidation in one part of the supply chain (grocery retail and
food service) has in turn led to a requirement for consolidation and the building of scale at
an earlier stage in the supply chain with the Commission itself noting Significant
alances in bargaining power between contracting parties are a common occurrence10 .
imbalances
Ireland is an example of this with the top three retailers now accounting for 79% % market
page). Retail concentration in Ireland is now amongst the h
share (see chart on next page) highest
ighest in
Europe .Retailer buying policies that are driven by opportunistic approaches to fluctuations
in the sterling /euro exchange rate (see section 5.2) further strengthen retailer dominance.
The real economy impact of this dominance is that the return to food production
manufacturing and supply has fallen in recent years as retail margins were maintained
during the recession.
Source: Kantar 2012
10
COM (2009) 591 A better functioning food supply chain in EuropeFDII would dispute the argument that regional investment aid is more effective and efficient
when geared towards SMEs. The Commission cites the easier access to finance for large
enterprises and the bargaining power of large enterprises vis a vis public authorities. We
strongly oppose the DG COMP perspective that regional aid should be limited to SMEs in c
regions because of the supposedly negative effects of aid in favour of projects implemented
by large enterprises. As noted above there are structural reasons in the supply chain as to
why food companies now more than ever need to evolve into larger enterprises at
European level and more particularly in Ireland. Furthermore access to appropriate medium
to longer term finance remains a problem for companies of all sizes in the sector.
Concerns have also been raised that distortions of competition and trade could occur on
account of different capacities of Member States to grant aid for investment purposes. Tjos
would occur either because of different intensity levels or because of different budgetary
constraints. Concerns that this could lead to subsidy tourism are incorrect and misplaced.
In reality outsourcing is not an option for the majority of food companies. The food sector in
Ireland must remain close to its raw material supply our unique grass based production
system is central to its product, cost and market profile.
7. Summary and Conclusions
The national agri-food strategy Food Harvest 2020 is based on an export led vision of smart,
green, growth. Proposals to increase exports by 42% (to 2020 from the 2007/09 average)
underpinned by medium to long term increases in global demand combined with a
competitive agri-business supply capability in Ireland.
Strong linkages to indirect expenditure in the wider economy by the food sector are
equivalent to almost 60% of sales.
Growth targets for the sector are estimated to deliver 40,000 jobs in the economy.
High entry levels of capital investment and low returns in the sector require medium to long
term financing facilities that are currently not available in the Irish economy.
Measures to facilitate the stimulation of growth in the agri-food sector, in particular
significantly higher aid intensity levels, will have a hugely beneficial effect on the wider
economy. This must be recognised in the revision of the regional aid guidelines.
Specific issues unique to Ireland or the food sector which need to be addressed when
considering amendments to the criteria used in the regional aid guidelines in order to
deliver significant increases in employment and value added in the Irish economy:
GDP per capita as a criteria in the existing guidelines on regional aid disadvantages
Ireland due to the large variance between GDP and GNP.Absolute unemployment levels (caused by structural rather than cyclical changes in
the economy as a result of the construction sector collapse and Ireland s
overreliance on it in employment terms) to be considered as the measure in
Ireland s case and significant intensifying of aid rates as part of derogation measures
to promote economic development and job creation in light of the huge increase in
the absolute unemployment rate in Ireland.
Being in an EU/IMF Financial Assistance Programme should be considered
justification for the continuation of exceptional policy responses (as was the case
with the Temporary Framework) these should include significantly greater aid
intensity levels in the Irish regional aid map in order to promote growth, economic
activity and job creation.
Similarly the extent of exposure faced by the sector to currency risk with the UK
(exports, imports and shared land border), presents a continuous threat of massive
disruption to the Irish food sector within the internal market.
FDII disputes the argument that regional investment aid is more effective and
efficient when geared towards SMEs and notes the structural reasons in the supply
chain as to why food companies now more than ever need to evolve into larger
enterprises at European level and more particularly in Ireland.
Food and Drink Industry Ireland
April 2012
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