Oireachtas Joint and Select Committees
Tuesday, 23 May 2017
Committee on Budgetary Oversight
Capital Investment Plan (Resumed): Irish Exporters Association
I would like to welcome Mr. Simon McKeever, chief executive of the Irish Exporters Association, and Mr. Patrick Daly, managing director of Alva Consulting and member of the Irish Exporters Association Council. They will outline the need for capital infrastructure to assist exporters.
Before we begin, I remind members and witnesses to turn off their mobile phones because of interference. I draw witnesses' attention to the fact they are protected by absolute privilege in respect of the evidence they give to the committee. However, if they are directed by the committee to cease giving evidence in relation to a particular matter and they continue to do so, they are entitled thereafter only to a qualified privilege in respect of their evidence. They are directed that only evidence connected with the subject matter of these proceedings is to be given and they are asked to respect the parliamentary practice to the effect that, where possible, they should not criticise or make charges against any person or persons or entity by name or in such a way as to make him or her identifiable. Members are reminded of the long-standing parliamentary practice to the effect that they should not comment on, criticise, or makes charges against either a person outside the Houses or an official, either by name or by such a way as to make him or her identifiable.
I invite Mr. McKeever to make his opening statement.
Mr. Patrick Daly:
I thank the Acting Chairman and members of the committee for inviting us today. Ireland’s exporting sector is one of Ireland’s greatest strengths and has been the key driving force behind the Irish economic recovery, economic growth and job creation. It is critical for the Government to recognise how vital Irish exporters are to Irish economic growth and to use the review of the capital plan to maximise the opportunities that arise from an increase in global demand. Although the value of Irish exports as a whole last year rose to nearly €117 billion, the highest annual total on record, the fluctuation of sterling resulted in a loss of nearly €600 million in the value of exports to the United Kingdom, half of which was in food and live animals. Brexit, in whatever form it will take, is coming and we need to prepare immediately. We need to plan new direct shipping and air links to Europe and the rest of the world; become more cost competitive; lobby strongly for as close as possible a trade relationship with the United Kingdom, in particular in agrifood, although it is not in our best interests for the United Kingdom to be outside the customs union, and we must factor this into our negotiations; ensure companies consider their entire supply chain and the impact of a UK exit on all their input costs and start thinking about alternatives; and attract foreign direct investment, FDI, from the UK and elsewhere for those who want to retain access to Europe.
Brexit is already having an impact on Irish exports but the worst may yet be to come. The UK leaving the European Union will have major implications on Ireland’s connectivity and processes need to be put in place to combat what is coming down the line and preparations need to start happening immediately.
Brexit poses a serious threat to Ireland’s regional airports, which depend heavily on the United Kingdom. One example is Ireland West Regional Airport in Knock. The United Kingdom currently accounts for 80% of the airport’s passenger traffic with nine direct scheduled destinations. Airlines and airports are going to have to start planning for 2019 and beyond with no indication of what the future relationship between the United Kingdom and Europe's single aviation market will be. The uncertainty cast by Brexit could seriously impede route development across Europe. Minimising any potential disruption and cost resulting from more rigorous immigration or customs border checks will be imperative. The implementation of hub connectivity from the west of Ireland directly into Heathrow or another European hub airports, such as Schiphol or Frankfurt, would significantly enhance business connectivity and attractiveness to locate in the west of Ireland. This can be achieved with the implementation by the Government of a public service obligation, PSO, scheme on a similar basis to the recently activated Derry to London Stansted route by bmi regional.
The Irish Exporters Association would also call for a full derogation from the EU on state aid support to regional airports handling fewer than 1 million passengers under the general block exemption regulation, GBER, and not limit it to airports handling fewer than 200,000 passengers, as announced last week.
With regard to Dublin Airport and the north runway that is scheduled to operational in 2020, passenger numbers at Dublin Airport increased by 11.5% in 2016, making Dublin Airport the fastest growing major airport in Europe last year. Traffic forecasts indicate the potential for passenger throughput figures of up to 36 million by 2022 and up to 50 million by 2037. The level of growth at Dublin Airport is staggering and infrastructure needs to be put in place now to ensure Dublin Airport is equipped for further growth in the coming years. Priority should be given to the metro north link between Dublin city centre and Dublin Airport and to ensuring that planning and road development in the environs is put in place to deal with this growth.
With regard to the national planning framework, as discussed by this committee on 13 April with the Minister for Finance, Deputy Noonan, the IEA would like to add to the issue that focus will need to be given to road planning and commuter regions outside of Dublin. Development of regional infrastructure, especially in the west, has been poor. The poor road network across Ireland is having an impact on IEA members being able to attract and retain suitably qualified staff. Some 61% of IEA members experienced difficulty in recruiting in the first quarter of this year. Members have cited poor road infrastructure and lack of improvement to employees' commute as a factor in poor regional retention. Regional development is imperative, not only to maintain business, but to attract investment and development in the regions.
Immediate solutions need to be sought to the broadband and mobile phone coverage deficits to businesses and homes across the country if Ireland is to remain competitive in a technological age. Improvements in broadband and the mobile phone infrastructure need to be immediate. The new wave of business innovation with technology, such as robotics, additive manufacturing, 3D printing, big data and analytics, block chain and new business models based on digital platforms, is giving rise to a deep digitisation of industry on the scale that has not been seen so far. The countries that aspire to participate and lead in this digitisation of industry will require very solid, robust and scalable ICT infrastructure, data centres and 5G communications connectivity.
Airfreight and the significant capacity constraints on services operating out of Ireland is being cited as an issue for IEA members. There is a consensus among IEA members who are logistics providers that there is a shortage of air capacity to all markets from Irish airports.
There is also criticism of terminal and cargo handling facilities for, in particular, pharmaceutical and other controlled goods at Irish airports. This is forcing freight forwarders to truck cargo to British and continental airports and fly it from there. Questions have been raised about the availability of storage, particularly refrigeration and control facilities at Shannon and Cork airports and now increasingly in the east of the country. The practice of cutting airway bills at Irish airports by shipping goods by truck to British or continental ports has relied on effective landbridge operations. The freight forwarders concede that they are now under pressure to use direct ferry or lo-lo services to the Continent.
The acute shortage of warehouse facilities around Ireland is a major concern. The development of warehouse facilities across Ireland, including specialist pharmaceutical storage facilities, as well as the development of ports and airports could be a significant opportunity to develop this country as a distribution hub to elsewhere in Europe. The United Kingdom currently serves this function because it has the storage capacity for onward delivery within the European network. There is a serious opportunity for the Irish economy in the development of logistics clusters, or geographically concentrated sets of logistics-related business activities. Logistics clusters typically develop around transportation hubs such as air or sea ports or areas in which there is easy access to road or rail networks. Like large industrial clusters, logistics clusters exhibit a positive feedback loop, which means that the bigger they become, the more they grow.
I would like to comment on the figures and trends in shipping. It has been reported in the Irish Maritime Transport Economist which was published by the Irish Maritime Development Office in April that although there has been strong growth in traffic through all Irish ports, there is an increasing imbalance with volumes through Dublin Port being disproportionately large, while local ports do not put through the volumes that a good spatial strategy would dictate. Ports such as Cork should develop to take more of their fair share of traffic. Ports such as Drogheda and Galway which have been defined as regional ports and given to local councils to run should also be supported.
According to a recent survey of IEA members, it is not just our exports to the United Kingdom that will be affected by Brexit. Our exports that transit through the United Kingdom to get to continental Europe and beyond will also be affected. Two thirds of our members make use of the UK landbridge to access continental markets. Of these, 40% have said the use of a slower direct route would have an adverse impact on the quality of their product, while 53% said a longer time supply chain would have a serious impact on their inventory and other costs. Having examined the comments made by the Minister for Finance, Deputy Michael Noonan, at the meeting of this committee on 13 April about the use of the United Kingdom as a landbridge, the IEA believes this serious issue needs to be considered.
We are aware that much of the focus in the context of Brexit has been on exports. Brexit raises many potential challenges for importers, particularly for the supply chain where imports make up part of the final goods exported. It is not a one-way traffic issue. A possible solution in dealing with delays at land border crossings could involve queuing systems similar to the Estonian go-swift queue management solution. I will explain how such a system might work at the Border. The driver of a truck or another vehicle would go online to request a transit time slot at the Border. Such a driver, having given his or her current location, would be allocated an estimated time slot and advised to go to a designated controlled parking area some distance from the Border. This would be used as a rest stop until he or she was called to the Border crossing. The system operates in a similar fashion for drivers heading for ferries or other vessels in Tallinn Port, or for the major distribution centres linked with it, thereby eliminating queues in the city and port area. This system of virtual queues of trucks moves them away from lands that could have many better uses than as truck and car parks.
Delays at ports mean missed ferry crossings, delayed ferries or missed sailings. They reduce available capacity and undermine the economics of these services. They can mean that companies in the food sector, for example, can miss their docking slots at multiples' distribution centres in the United Kingdom. More and faster direct services to the Continent are needed. Waterford Port and Rosslare Port, in particular, will need capital funding both for the ports and road access to them. Under EU transport policy, neither of these ports is defined as a core port. For that reason, they do not qualify for TEN-T funding. There is scope and potential for an intermodal system between Rosslare and Cherbourg.
Indigenous Irish businesses are woefully unprepared for Brexit. From an administrative perspective, someone who has only ever exported to the United Kingdom has never had to deal with customs procedures. Realistically, the training and upskilling of staff should start happening now, rather than waiting until the chaos of implementation. The current situation highlights the need for Ireland to diversity its export markets. We need to focus more of our attention on high-growth markets such as China, India, the ASEAN states, Africa and South America. We need to become less dependent on our trade relationships with the European Union, the USA and the United Kingdom. There is a need to develop infrastructure around this.
Exports continue to lead the way in driving the economy forward. They are the most significant contributor to making Ireland one of the fastest growing economies in the world, helping to reduce unemployment, creating new employment in fast growing innovative companies and reducing the national debt. Exporting is the success story of the economy. It has helped to restore the country’s image abroad, attract greater foreign direct investment and foster the development of home-grown companies by encouraging more and more entrepreneurs to grow their businesses internationally. As a small open economy, Ireland can be particularly vulnerable to economic fluctuations in global markets. We are asking that investments be put in place to develop the infrastructure required to support the export markets of the next 50 years.
I welcome the delegation from the Irish Exporters Association. Mr. Daly has given us one of the starkest presentations we have received in this series. This was intended to be a review of the capital plan, but it has become a review of the capital plan in the context of Brexit. The presentation we have received places a very stark focus on how ill-prepared we are for a soft or hard Brexit. It appears from some of the commentary in the Bundestag this afternoon that it will be a hard Brexit.
I would like to tease out the association's proposal for public service obligation flights into a hub. I expect that Heathrow Airport will be relatively redundant in this context after Brexit, when all of the difficulties Mr. Daly mentioned will be evident. I presume the hub would need to be within the European Union. What public service obligation changes would the delegates like to see to allow us to develop it? How has it worked in Derry?
I would also like to ask about the landbridge crossings. If we are to pursue Waterford and Rosslare as the two main ports that need to be developed with Dublin Port, what capital investment will be needed in the view of the association's members? Mr. Daly referred to inadequacies in areas such as storage and access. What specific investment is needed in these two ports? What are the delegates' views on the ownership structure of Rosslare Europort which seems to be presenting a challenge in the development of the port in order that its potential can be maximised?
Mr. Daly mentioned a series of regional infrastructure challenges. We will be drawing attention to all of them. If he were the Minister, Deputy Paschal Donohoe, and in charge of allocating the extra capital budget to specific projects, what would they be? Does the association have a view on what should be done with the proceeds of the sale of AIB, the first tranche of which will be available soon? In view of the starkness of the association's presentation, should the proceeds be used for capital investment?
Mr. Simon McKeever:
I will try to answer some of the Deputy's questions before asking Mr. Daly to respond to the very first question which was related to multi-mode routing.
The Deputy asked whether some of the proceeds of the sale of AIB should be used to develop the infrastructure needed in the context of Brexit. We have tried to portray that what we have will not really meet the needs associated with where our exporters need to go. They need to go further afield. It would be great if some of the moneys from the sale of AIB could be diverted towards capital spending.
I do not want to go into massive detail on the ownership structure of Rosslare Europort, other than to say the duality there poses a number of challenges in further development. Waterford and Rosslare are probably the two ports that could be used to open further direct routes to continental Europe.
We have talked to our members about the challenges they will face if the land bridge is not to be utilised going forward and a number of them are looking at alternative routes. Approximately 57% of them have said that they could use alternative routes but in certain industries where time is of the essence, particularly the food and drink industry, the options are more limited. It has been estimated that routing goods to the Continent via northern or eastern European routes rather than via the land bridge can add up to eight hours onto transit times. In terms of sell by and use by dates, that could have serious implications. It might not make a big difference to traffic that is going into southern Europe.
It has been well documented that the infrastructure in the west of Ireland is a nightmare. Recently we held an event at the airport at Knock. Once one reaches Mullingar, one is on a single lane highway, if even that, all the way to Knock.
Mr. Simon McKeever:
I have been to Galway six times in the last seven days. Broadband in the countryside is also an issue. A number of members in the west have also told us that they are having difficulties attracting and retaining skilled and qualified staff. Even if they manage to get staff to come from places like Mullingar, within a matter of months they have leave because they are not prepared to put up with the commute. It is a real issue for them over there. Every time we go over there we are appalled by the state of the broadband provision. We had an event in 2015 over there and the broadband kept cutting in and out. It was shambolic. That part of the country is a bit neglected and needs a considerable increase in infrastructural spending.
Mr. Patrick Daly:
We were asked to outline the projects we would like to see being developed. Despite the challenges, we have some great opportunities, one of which is in the development of logistics clusters. These are areas where logistics activities are incentivised and concentrated and they provide many advantages for a country, for industry and for employment. They tend to replace lost manufacturing jobs in developed economies. A number of years ago, for example, Dell left Limerick with the loss of a considerable number of manufacturing jobs. Such jobs can be replaced by logistics hubs, which provide value-added activities such as localisation, product assembly and configuration and potentially, 3D printing. They are less susceptible to off-shoring because a lot of the technology and economics of transport and distribution make them more immune. They also serve as infrastructure to other industries that require specific logistics capabilities. Ireland, for example, has a high concentration of medical devices and pharmaceutical companies. We could develop logistics hubs around those industries that could be based on either sea or air transport. In terms of sea transport, we are talking about the south of the country and I would not lose sight of Cork, which is a particular hub for medical devices, chemicals and pharmaceuticals. In terms of logistics hubs in the air freight industry, Shannon is probably the only airport that has a runway of the required length to service a fully loaded Boeing 7470-400. Such aircraft require a runway of between 9,000 and 11,000 feet. Shannon's runway is 10,500 feet whereas the runways at Dublin Airport are only 8,600 and 6,800 feet, although I understand the proposed new runway in Dublin will be 10,200 feet.
Logistics clusters do not depend on a single industry vertical. They serve multiple industries which makes them more immune to shocks in the economy. They favour social mobility because the logistics industry values deep operational experience on the floor. They create broad based employment because they need warehouse operatives, drivers, customer service personnel, mechanics, technicians, engineers, IT managers and supervisors. They also create a sustainable tax base that would at least defray or offset some of the cost of developing them in the first place. They can be a stimulus for regional development which makes for a more balanced spatial strategy.
Examples of logistics hubs include places like Rotterdam, Singapore and Panama. Plaza Zaragoza in Spain is of particular interest because some of the factors contributing to its success are, or can be, replicated here. They include favourable geography which we also have; supporting infrastructure which we can develop; and a supportive and efficient Government, in terms of creating a business friendly environment, on which we also score highly. We can build education, research and innovation into these logistics hubs. The National Institute for Transport and Logistics which sits in the DIT in Aungier Street is developing degree courses in supply chain logistics and is an example of the type of institution that could set up a branch in a logistics hub. Logistics clusters also give rise to quite a lot of collaboration and value-added services.
I asked a question about the public service obligation, PSO. Do the representatives have a proposal in that regard, in the context of the regional airports? There was a change in policy which was acknowledged last week but it took four years of absolutely heart breaking work to even get that change in policy. Are the witnesses saying that it is not sufficient?
I welcome the witnesses to the committee. The Irish Exporters Association has conducted many surveys among its members which have shown that they are becoming more nervous about the outcome of Brexit as time goes on. The last survey results that I read showed that 92% believed that it would be detrimental to Irish exports. The witnesses said that indigenous businesses are woefully unprepared for Brexit. Have they seen any changes over the last year in terms of the preparedness of businesses for the potential outcomes of Brexit? If not, what do they believe needs to happen so that businesses are ready for whatever comes out of the negotiations?
Mr. Simon McKeever:
In the beginning, just after the vote, it was all about the currency. Some companies have gotten their heads around it but a lot of companies have not. The last time we took a dip in to see what level of coverage was there, most of it coming off at the end of this month.
We checked to see where the point of pain was on the currency. Last year, in the wake of the vote, it was a rate of 80p to 85p to the euro and it is now around 85p to 90p to the euro, so there has been some adjustment to the currency.
When our organisation, which is national, goes around the country doing different things, the focus is more on customs, VAT and the supply chain. Bigger companies are beginning to get their heads around these. Smaller companies really need to do so. What happens if there is disruption to the landbridge? What happens if there is a North-South Border? What happens to the huge amount of trade in and out of the United Kingdom? Our CSO figures do not really show the kind of trade that is going back and forth in the supply chain, particularly in an east-west direction. Therefore, many items are going back and forth that do not really get counted but which end up making finished goods. We made the point that it is a matter of imports as well as exports.
Our sense from companies is that bigger non-Irish-owned ones are getting their heads around the customs piece. There are a number of different models that are quite useful and helpful. I have had a number of conversations with the bigger Irish indigenous companies and was quite shocked by the level of unpreparedness. They are beginning to get their heads around the customs piece, however. Smaller companies are not. What we really need to do is help companies understand the implications and not only in regard to customs. Where the Border really will be probably will not be between the North and South but in people's offices, because they will have to deal with the consequences. Even if there will be no duty or tariffs, there will be paperwork. The first implication of a border is a higher administrative burden on people. We have seen figures indicating an increase in the cost of doing business of anything up to 24%. If a company is already trading somewhere else in the world and not just with the United Kingdom, it already has experience in learning how to proceed in this regard. If the many companies that are trading only into the United Kingdom do not have such experience, they will need to learn.
We run an SME programme that we bring around the country. We also run a supply-chain initiative that we bring around the country. It is very heavily focused on the customs piece. We run a thought leadership initiative. It is the one on the supply chain that packs the room. People are beginning to develop awareness.
I wish to refer to something Mr. Daly said. We envisage a big threat to rural Ireland in the wake of Brexit because the agriculture sector will get very badly hit. The displacement that might happen over a five or ten-year period is potentially enormous if we end up having to pay tariffs of 50% on our beef and 60% on our dairy produce going into the United Kingdom. In our conversations with various British Government organisations, we have tried to get across the message that Britain is short of food and does not generate enough for itself. We are a natural breadbasket. How can we ensure that, in our negotiations, we can secure what we desire in this regard? There is great fear, particularly if Britain leaves the customs union, that it will rush to secure trade agreements with the likes of Mercosur. In the meantime, representatives from a huge country like China are going around the world. China has a massive food security issue. It has bought up some of the biggest sheepmeat and pork producers in New Zealand and America. Therefore, there is competition at a global level over food security. The message we have been giving to the British Government is that we can continue to provide security for it. The question will be one of what Britain, if it is buying cheaper food, will substitute our produce with if it is so much more expensive. Have I answered the Deputy's question?
Yes. Very helpfully, Mr. McKeever stated there is not one-way traffic. With food, it is two-way. Britain is dependent on us but if there is the type of trade agreement in question, it will be reciprocal. It is not only about tariffs but also about the regulations. If only Ireland and Britain were thrashing this out, we might have some type of outcome but there are many other factors at play here. For example, we have just heard from French farmers who are arguing for a hard border because of fear of cheap food imports coming through Britain.
When Mr. McKeever says some of the larger exporters are starting to get their heads around the matter, I presume he means they are getting their heads around the fact that they have to do the administrative part, addressing the burden and costs. They are starting to understand what they will have to do even if there are no tariffs or duty. Are businesses starting to get their heads around the idea that there could be tariffs? What would happen in this regard in respect of their business plans and projections? I refer not only to WTO tariffs but also to some other types of tariffs.
Mr. Simon McKeever:
With bigger, international companies, the answer is "Yes". To take it back a stage, the very first thing they need to do is to start assessing what the United Kingdom's emergence from the European Union will mean if the worst-case scenario materialises. Everybody is thinking about the worst-case scenario from a WTO point of view. If a business could examine everything it did last year and push it through a programme that is able to spit out what the difference to one's business would be this year – there are such programmes – it would result in a very stark message. Bigger companies are beginning to examine the risk assessment piece. Smaller companies are really just beginning to get their heads around what it all really means to them. Smaller ones are not there at all. Some of them are still trying to get their heads around the currency piece.
We have been learning that a number of businesses are considering establishing units in Britain with a view to manufacturing there for the British market instead of exporting from here. How prevalent is that trend? Is it being considered?
Mr. Simon McKeever:
That conversation is ongoing. We had an event yesterday at which there were three manufacturing companies in the room. One company's representatives stated it was beginning to consider this. Then another company's representative said it might need to start considering it also. One might see a trend in the other direction in that, if customs tariffs are imposed, the supply chain may need to shorten in this country. Some of the food and drink companies sending goods back and forth across the Border might need to produce more in Ireland also. There may be some small counterbalance against the trend.
Mr. McKeever talked about a possible solution, the GoSwift queue management solution. It has been internationally recognised by the OECD and others. Representatives of the Revenue Commissioners were before the finance committee and they talked about how there would be electronic trade management for the vast majority and that 6% of freight could be directed to a location perhaps 10 km to 15 km away from the Border where there would be electronic checks and that there would be random patrols or monitoring where people could be called in along the Border. How realistic is that to Mr. McKeever's members, particularly those who are trading on both sides of the Border quite frequently? The last survey I saw indicated that 67% of members were exporting to the North. How challenging would the disruption and time delay be to individuals?
Mr. Simon McKeever:
It would be challenging. It gives me some comfort that the figure the Deputy is stating, namely, the 6% of goods that may need to be checked, opened and examined, is a lot lower than the very stark figure that was mentioned at the very beginning of this process nearly a year ago. It absolutely will be very challenging. In the best-case scenario, for most types of trade an electronic message will be sent from the cab of the truck as it approaches the Border.
However, the type of freight that may need to be inspected will go into an inspection point. That will be challenging because it does not exist at the moment.
How can one deal with that? The Estonian GoSwift service operates at three major crossing points but we have a Border that is so porous. In Donegal there are dozens of ways that I can travel the Border. If I am travelling up in Inishowen, will I be diverted to a checkpoint in Letterkenny? What if I am travelling down in Pettigo? We are not going back to the situation where we are closing the Border roads. There are hundreds of crossings. Is it possible to do that?
Mr. Simon McKeever:
No. It will be extremely challenging. We are kind of at the beginning of a process where these things will have to be discussed and put out and then a solution that will work put together. I guess what is happening is that we do not really know what the conditions will be. At the same time, we are trying to devise a solution to a challenge, the nature of which we do not really know. Suffice it say that the volumes and the frequency make it very challenging. For all involved, it will be very challenging.
Another thing that we need to be cognisant of is that, notwithstanding the fact we have to deal with the United Kingdom in the future and that we have to come up with new solutions, the world does not begin and end with the United Kingdom. I make that point because our export figures are very impressive. I think we said there would be €117 billion in merchandise exports this year. However, if we strip out the exports of perhaps ten or 12 multinationals from that, what is left is not really that impressive in the sense that it is over-reliant on traditional markets, particularly the United Kingdom, other countries such as the United States, and near European countries. We have been making the case for many years, before Brexit was ever a likelihood, that SME Irish exporters need to diversify their markets. However, as Britain was there, was easy, is big and so on, people said they agreed but they did not do a lot about it. There were some exceptions, of course. However, we now have to start looking beyond and need to begin to diversify.
Think about countries such as Morocco which has 35 million people, a growing economy and a front onto the Atlantic. It will be a major hub and market in itself. Think of a country like Mexico. Our trade with Mexico skyrocketed over recent years, although it has stabilised quite a bit recently. Think about countries such as Indonesia and Colombia. These countries are open for business and are growing. They have huge requirements that we can satisfy, but we have not really been able to step up. If we strip out the multinationals and compare our export figures with our peer competitors, such as Belgium, the Netherlands and Finland, they export something like 20% or 25% of their volume to developing markets or, if one likes, exotic or unusual markets. Our figures are in single percentages, so we have a huge job to do but a huge opportunity at the same time.
Both witnesses are very welcome. Their opening statement is to the point. It is pretty blunt and pretty sobering. I would like to pick up on Mr. Daly's very welcome emphasis on Irish-owned companies. There is a danger with such strong total export figures last year, being the highest on record, that we miss the fact that Irish-owned companies account for only 13%. While the multinationals are eminently welcome here and long may they come and grow, the ESRI's recent analysis is that the exports from Irish-owned companies are not where they need to be. In fact, the international data suggest that we sell rather than scale. On his point, we have focused on the Anglo-Saxon world. Most Irish exporters that I know do not really differentiate between selling in Cork and selling in Birmingham, for example. The UK is seen largely as a domestic market. I, therefore, very much welcome his pointing to that and the fact there is a huge opportunity.
In fact the single greatest opportunity for Brexit is not to get the banking authority or the medicines authority but to use it as a stimulus for many of our firms finally to move beyond, largely, the UK. To that end, specifically for the Irish-owned firms, as the multinationals have all manner of sophistication and resources available to them in international supply chains, if Mr. Daly were to prioritise one, two or three things the State could do for them, some more than others, to help them understand and mitigate the Brexit related risks they are facing but also, critically, to start viewing Brexit as the necessary push for them to do everything they can not just to continue selling into and buying from the UK but also to move beyond that to the Baltic countries, the Nordic countries, central Europe - Mr. McKeever gave the example of Morocco - what would they be?
Mr. Patrick Daly:
I spend my days working with both multinationals and Irish-owned companies and there is a stark difference between them. It is almost like a time gap of perhaps somewhere between ten and 20 years in the sophistication and, I guess, the resource and the world view of business. Irish companies are somewhat at sea in terms of how they go about doing it. They know it is a pending subject but they wonder how they are to tackle it because they do not have the resources or the skills, principally, and consequently they do not have the confidence. A lot of this is an issue of confidence.
I would therefore highlight two things. In Enterprise Ireland we have a very capable network. However, in some regions of great opportunity it is under-resourced. For example, prior to this year, I chaired for two to two and a half years the Latin America trade forum in the Irish Exporters Association. We saw opportunities in countries such as Ecuador and Mexico, Colombia and Chile in particular - the Pacific Alliance. Those countries are open for business. We had a number of events throughout the country and there was a lot of latent interest in them. However, how does one go about it and what staff does Enterprise Ireland have? It has an office in Brazil, which I think is not one of the four that would be of most interest. In Mexico, we have a consultant but we do not have a permanent Enterprise Ireland person there.
The great capabilities of Enterprise Ireland may be to extend into the countries that are open for business and where there are real opportunities for us. We have focused a lot on the BRIC countries - Brazil, Russia, India and China. If one thinks of those four countries, they are quite protectionist in their outlook. There are many other countries which are not so big but of medium size that really are open for business, including Morocco, Mexico, Indonesia and Colombia, which I quoted. I think we would be pushing an open door there.
The other aspect is skills and knowledge. We have the National Institute for Transport and Logistics which has been doing a good job with the resources it has. It is located inside DIT in Aungier Street. It has developed qualifications in supply chain logistics, transport and so on. In terms of investment in those skills which are related to supply chain and the new wave of technologies that are coming down the track, we have a great opportunity to get ahead of the pack. I am speaking about technologies such as additive manufacture, 3D printing, robotics and automation, the Internet of Things and blockchain technology. To be able to get to the front of the queue on this, we will have to develop highly integrated and robust digital infrastructure. We will need 5G communications networks in this country.
The Minister, Deputy Naughten, announced last year that the auctioning of the 5G bands is in plan. I am aware that something is happening on that front. We could leapfrog some of our competitors in respect of education and developing expertise in this area, if we go about it the right way.
Mr. Simon McKeever:
Can we incentivise a focus on those other parts of the world? People go to the UK because it is much easier to identify opportunity over there as they have a level of connectedness into that market. I worked for a different country's agency prior to working here. What it did very effectively was to gather all the opportunities in a particular market systematically for its companies back home. There was a central database so that a company making widgets, for example, could see who was looking for widgets in what part of the world. Such a focus should be incentivised. It is not just a matter of the technical skills about which Mr. Daly is talking. Language and cultural skills are also important. We need to take in secondary and third level education in order to build a long-term plan. This is not something that can be resolved overnight.
In respect of opportunity identification, we need to make it easier for people to get out there. People go to the UK because they can jump on a flight on a Monday morning and be back that night to put their kids to bed. Can we make it easier for companies to get out there? As I said, I have worked in another country's system in which its version of the Department of Foreign Affairs and Trade and its state agencies worked together in a very unified fashion. It is possible to combine all the assets that a government has at its disposal in a more effective way. In fairness, it is beginning to happen in Ireland. We need better co-operation between the Department of Foreign Affairs and Trade, Enterprise Ireland, IDA Ireland, Bord Bia and all of those guys who are working together in-market. Nobody opens a door better than an ambassador. Other countries are much better pulled together in-market. That starts at home, as I have said to this committee on previous occasions. It is something we really need to do. Furthermore, a great deal of money goes into putting a senior person from one of those entities into market, sending the individual and his or her family and educating them. There is likely to be very able local people already in the market, who could do the same thing for a fraction of the price and would be only too delighted to have the experience of working for a foreign country. That is what I did. It is an incredibly powerful way of doing things. We are probably not using the money we have in the best way we possibly can.
Everyone is working hard to try to get a transition period after Brexit, from March 2019 onwards. It is by no means certain, however. If a cliff is reached, one of the agreements of which the UK will no longer be part is open skies. What would be the impact on the members of the Irish Exporters Association if the UK were to be outside the open skies policy? The witnesses' submission indicated that 80% of the trips from Knock Airport are to the UK. If that cliff is reached, which is possible, and no transition plan is in place, what would that look like for exporters?
Education was mentioned. Is it a big failing that we are missing out on teaching children different languages at a very young age? We have this mental block about it. It is easier to do business in Britain because they speak the same language. We cannot communicate if we do not know the language.
Mr. Patrick Daly:
I have an anecdote that bears testament to what the Vice Chairman is saying. I lived in Spain for ten years and married a Spanish lady. My eldest son was born in Spain and is bilingual. The first job he had in Ireland was in a customer service centre. He got the job because he was a fluent Spanish speaker. When he went to work, he and one other person were the only Irish nationals in the place. All the other people were foreign. The language skills are simply not available in this country. It is a block in the sense that we do not seem to promote it in our education system the way we ought to. As a result, we tend to concentrate our efforts in the Anglophone world. It is possible to do business in English in many places but more is needed if we are to get the relationships that are so important in a globalised economy. It makes sense to be promoting languages such as Spanish, French, Mandarin and Portuguese.
Mr. Simon McKeever:
Let us presume we want to build a model whereby we are trying to send many of our companies to other parts of the world. Our main connectivity for non-UK airports is through Heathrow at the moment. If our members need to fly to Shanghai or somewhere else in the world, they need to find alternative routes. It is not as bad out of Dublin as it would be out of Cork, for example. I have not looked at this since the sale of Aer Lingus. There is reasonably good connectivity to other European destinations out of Dublin but it is nothing like what we have through Heathrow. From a services point of view for people who are travelling, it would cause a blockage. On the freight side, a lot of our freight is hubbed through Heathrow at the moment and it would have to hubbed through another airport. The alternative, which we include in our submission, is develop the capacity here in Ireland through greater warehousing. There is a cost implication and a potential delay factor if the cliff is reached. I think we are heading towards a reasonably hard, but not an extremely hard Brexit, given the rate at which the rhetoric is being dialled up at present.
We would love to have tens of billions of euro to spend on capital but, with the best will in the world, that is going to be very difficult in the short term. Do the witnesses have an estimate for the level of funding that would get us to the point of being good enough? Their statement lays out very starkly that there are serious capacity constraints across a range of transport and export areas. We have to ship freight to the UK or elsewhere because we do not have the capacity to take it out through our own airports. There are particular constraints on the western airports. How much money would it take to get us, not to being best in class, but to the point of these matters no longer being a constraint on our growth?
Mr. Simon McKeever:
While we do not have those details, the answer I would give is that we are looking at needing five to seven years to replace any trade we might lose to the UK. That is compounded by a massive hit in rural Ireland and the jobs that might go there, although Mr. Daly has suggested something that might replace some of them. What kind of investment is going to be required to replace the trade that we currently do with the United Kingdom? I will come back to the Deputy but I would think it is fairly substantial.
Brexit is a centre stage at the moment. The visit of our negotiator, Mr. Michel Barnier, two weeks ago left me even more concerned. I can hear the water tumbling over the cliff edge. It is no secret that Mr. Barnier indicated there would be great flexibility in the movement of people.
What I heard in the visit and subsequently is that there would be no flexibility in regard to services and goods from the European side and similarly, no flexibility from the UK side in terms of what would be needed to retain them within the customs union. In those circumstances that is the cliff edge. It is very hard, politically, to see how we can steer away from that. I think we need to change tack to try and avoid it but it seems to be coming.
There is a crucial issue for rural Ireland and that is recognised but there is also an issue for digital services. I would be interested to hear what the witnesses know or what members in that area believe will happen if there is such a cliff-edge approach where we cannot get a transitional deal and the UK crashes out. I accept that people have said we will revert to WTO rules. Have the witnesses looked at the implications for software or digital services companies? Has analysis been carried out on what are the constraints? I was interested in the comment about a potential 24% increase in administrative costs but there may be other issues, for example, if one is sharing data with the UK as part of one's service system. For example, will we be able to transition straight into a safe harbour or other arrangement that allows those data transactions to be part of everyday business, which is what they must be?
If we are not in a customs union, I imagine the import-export business will be very complex. A lot of companies rely on products provided through the UK, via the Birmingham and Manchester distribution system. One sees trucks coming over here carrying everything from sandwiches to high-tech devices that feed into our industries and go back out again. Are people looking at an alternative distribution system to that? Is it viable to look at a continental link via Rosslare where some of those globally traded services might come in?
Given the scenario which the witnesses seem to share, are we hearing about any difficulties for Irish exporters in terms of financial institutions giving credit? If someone is looking to make an investment or agree credit terms around a future trading arrangement, at what point will the banks say they are sorry but they are nervous about lending on a facility because they do not know what the business case is for import-export businesses? Is there any sign yet that financial institutions will start to be nervous about providing credit for companies that might be exposed in that regard?
Mr. Simon McKeever:
I will take the Deputy's last question first. In my anecdotal discussions with some of the banks I have been told that they will carry out a Brexit assessment next year on credit assessments, how ready companies are, what they have done and what modelling and planning has been put into the business to deal with what may happen.
What happens in those circumstances? If Mr. Davis is correct, if the British do not agree the sequencing of the talks one could see a situation where the British decide to exit the talks straight away.
Mr. Simon McKeever:
Yes, that could happen. The talks have a very strict timeline of a year to be conducted because the agreement needs to be ratified by the various parliaments afterwards. The sense I got from a recent visit to Brussels is that there would be two years of negotiations for exit and probably a three-year interim deal where nothing would really change and then the UK would be out. Is Deputy Ryan asking whether banks are fully prepared for whatever might happen? When I was talking to them in September to October last year, they were beginning to do an assessment on what companies were trading into where. One of them told me the other day that from next year they will be building that into the credit assessment in a very formal way. One could ask if the UK were to come out, would a bank suddenly turn around and say it could not lend the money after all? It depends on whatever covenants are in the deal. I do not think the drawdown on a lot of loans is as great as what is sanctioned. That is what I am being told anecdotally as well.
I might get Mr. Daly to talk about alternative distribution but the substance of our presentation is about alternatives. Mr. Daly will be able to give a bit more detail. We are beginning to look at the data piece. I would raise two issues in that regard. If one is looking to house data, would one be better off housing it in the UK or in a European country in a post-Brexit environment? I think that is a question some of those ICT companies are asking. In the very initial stages of the dive we have done into those companies, ICT companies have a lot of hardware, as well as software, and they foresee considerable difficulties in getting some of the hardware back and forth into the UK from a customs point of view. I do not know whether Mr. Daly wants to add anything to what I have said.
Mr. Patrick Daly:
As for what we do if Britain crashes out sooner rather than later, we do business with many countries every day that are not members of the European Union yet we do business with them. We do business with China, the US and so on. Many of the companies that are doing business in those countries are larger companies and many of them have sought what is called AEO, approved economic operator, status, whereby their logistics systems are approved from a security and integrity point of view by a recognised body and then that foreign country accepts that AEO status and that facilitates the entry of their goods into that country, lowers costs and speeds up the supply chain. In the worst case, we would expect that AEO recognition would still exist between the UK and the European Union. Up to now my understanding is that in Ireland only the very larger companies and some of the big logistics service companies that carry goods on behalf of shippers have taken the trouble to go down the route of getting AEO approval but many more would do that and will do that. At the events we have been holding in our supply chain series in recent weeks, which will continue, we hear SMEs talking about those things already.
In terms of an alternative distribution route, on the supposition that it is a bad exit and the costs become prohibitive to coming through the UK and using the landbridge, the point Deputy Ryan made is very pertinent, in that it is not only what is coming from the UK that is made in the UK but what is coming through the UK even though it may have originated in Holland, Belgium or France because there would be customs clearance entering the UK on one side and the other and then a customs clearance here in Ireland.
Lots of good coming from far afield come to Ireland through transhipment in Felixstowe or Liverpool. If that became a problem then we would be looking at ports like Rotterdam and Antwerp and perhaps Le Havre. One of the issues is that many companies in continental Europe who are doing business with Ireland, in particular in consumer goods, view Ireland if not politically at least geographically as an appendix of Britain and from a distribution point of view, there is a big distribution centre somewhere in the UK and Ireland is served from it. The reason they do that is because the volumes and the economy make sense, so if that becomes prohibitive and one has to do it from the Continent direct to Ireland those volumes will be much smaller because our economy is one tenth the size of the UK economy and consequently the unit costs will go up. What would happen is that while the costs would go up because of the physicality of the distribution channel and the distances and times, it would require a lot of innovation on the part of operators to see what they could do to streamline the processes if their costs were going up here in order to improve communication and integrate better with France, Holland, Belgium and so on. We would get through it, possibly with higher costs, but in the challenge of doing it we would become stronger and we would learn how to do business better. In a way, Brexit is breaking Irish-owned SMEs out of the complacency that I think has gone on for too long, in terms of doing business easily with the United Kingdom.
What are the priority projects for the north-west region to assist exporters there? Will the witnesses comment on the importance of Knock Airport for the region's connectivity and what should be done to enhance its capabilities? What are the exporters in that region saying about the investments they require to improve their access to markets? Has the Irish Exporters Association, IEA, engaged with the IDA and Enterprise Ireland on development in the regions, in particular the western region?
Has the IEA a view on the Chinese Belt and Road initiative and is there any scope for Ireland to engage in that investment in connectivity across Europe and Asia?
Mr. Simon McKeever:
We have included our comments on Knock Airport in our submission. We had an event in Knock Airport two weeks ago. It is quite an impressive airport, which is very much needed in the west. Road access to the west is of critical importance, particularly for companies that want to ship goods. At present they must transport goods to Dublin Port, so the road from Castlebar to Mullingar desperately needs to be upgraded. We have heard anecdotal evidence from our members of how embarrassing it is for them when bringing companies to different parts of the island that are not on the motorway system. It is a let-down. What I notice when travelling from the west is that the road going into Longford seems to go on forever. One is looking at it on the satnav for what seems for ever. Where I would put investment is into upgrading the road system and broadband. Broadband is critical with the new technologies Mr. Daly spoke about, as well as with remote working. We have to hand all sorts of maps showing the broadband service in the regions and the broadband situation in the west is a total embarrassment.
Mr. Patrick Daly:
Should the Chinese Belt and Road initiative be realised as described by the Chinese Government, it will be the largest infrastructural investment that the world has ever known. The project faces many geopolitical challenges, as well as pure geographical challenges. In effect the Chinese are looking to develop a modern-day Silk Road across the western reaches of their country in through Central Asia and on to Europe. There are trains moving freight across the territories already. There is a London to Beijing freight train. At the same time, there are many logistical challenges. China, as an economy, is maturing and becoming more sophisticated. They are becoming more attuned to the requirements that people have to protect their intellectual property and much of the piracy and counterfeiting activity is beginning to decline.
It would be in Ireland's interest to keep an eye on the Road and Belt initiative. I know that many western countries are putting their hand up to show their interest in co-operating with the Chinese. I think we should do that. This initiative is at an early stage and it is not altogether clear what it will turn out to be. We have nothing to lose by becoming as involved as possible.
Mr. Simon McKeever:
May I make a comment? There has been a regional focus to our engagement on Knock Airport, but we must also talk about the Dublin region. One of the issues that is being raised with us, and it is included in our submission, is the severe shortage of warehousing space. As Dublin Port and Dublin Airport are such a significant part of the exporting infrastructure, one potentially has a back-up of traffic around a point on the M50. If one looks at the development plan for Dublin Airport in particular, to my knowledge, there is only one entrance and egress from the airport. Something needs to be done in upgrading the infrastructure around Dublin Airport, including the metro north that really needs to be accelerated. It is important to mention that, although it is not in the Deputy's part of the country.
It is. Mr. McKeever should not mistake my questions on the regions as a lack of concern for Dublin. I fully appreciate that if Dublin is not working, it will have implications for everywhere else as well. I take Mr. McKeever's point and I agree with him.
Mr. Patrick Daly:
On the shortage of warehousing, it is almost analogous to the issue with housing, in the sense that when the recession hit, no further warehouse infrastructure was built and in the same way that the recession caught us by surprise, the recovery has caught us on the hop as well. Quality warehousing for pharma and medical devices is in short supply. I have many clients in this sector and the shortage is very acute. It is beginning to stifle their ability to put in supply chain logistic strategies for their manufacturing businesses for the future. It will take time for that warehousing infrastructure to be built and my understanding is that both the banks and the developers are facing issues similar to those faced in housing. There might be a certain reluctance on the part of the banks to finance certain projects. Some multinational manufacturers are reluctant to invest in building their own warehouse facilities but they need and want warehouse facilities. They are beginning to develop creative solutions with developers-logistic service providers to build facilities close to their manufacturing operation and to work in lease-back arrangements where they change the capital expenditure, CapEx, expense which the corporate companies in the US and UK will not countenance to an operating expense, OPEX, in terms of an ongoing logistics cost. Some of the challenges are to have enough people who will come to the table and commit to building a warehouse and providing a service for the next ten to 15 years. We need to be cognisant of the fact that there is a block to bringing logistical infrastructure online in the private sector that perhaps we could look at addressing through creative logistics hub schemes that can have some public support also.
I thank the witnesses. I am aware that Mr. McKeever has another appointment. I thank the witnesses for their very interesting contributions that highlight and make us aware of the seriousness of what we are facing. It will be very important to have more debates such as this to advise the public. I am sure we will be calling on their services again as I think it is important to keep up to date with what is happening. It will take a great deal of pressure for the European Union to recognise the difficult position in which Ireland is being left through no fault of our own. Our special case is not a special pleading but it is owed to us because of circumstances that are way beyond our control. If the European Union is to mean anything, it means that we look after one other and that must be taken into account when we are looking at what can and cannot be done.
Again I thank Mr. McKeever and Mr. Daly for coming before the committee. I found their contributions extremely interesting.