Competitiveness

The National Competitiveness Council in the Costs of Doing Business in Ireland 2016 report found that:
  • The EU is among the most expensive locations for electricity and gas globally, and within the EU, Ireland is one of the most expensive countries for electricity for both large and small users - it is the 5th most expensive location in the euro area 17 for large electricity users.
  • The cost of credit continues to act as a drag on the enterprise sector, inhibiting investment and growth, particularly amongst start-ups and SMEs
  • In November 2015, the interest rate in Ireland on loans of up to €0.25 million was more than 80 per cent above the euro area average rate for new business; the rate on loans of up to €1 million was more than 60 per cent more expensive in Ireland
  • Furthermore, Irish interest rates for commercial loans have been noticeably more volatile than euro area rates. Irish and euro area interest rates diverged further in 2014 and 2015
  • Ireland remains an expensive location in which to do business with a price profile which can be described as “high cost, rising slowly”

There are two areas in particular where Irish companies are at a significant competitive disadvantage to their UK counterparts – labour costs and capital costs. Past research has shown these are also the major costs items for manufacturing business. As a result Ireland already has significant cost disadvantages from both an Opex and Capex point of view for food companies when compared with the UK.

Labour costs

KPMG data quoted by the National Competitiveness Council in their recent report on the cost of doing business in Ireland showed that typically labour costs (including income tax) can constitute between 49% and 72% of business costs in manufacturing. In this context the existing labour cost differential between Ireland and the UK will put Irish firms at a further cost disadvantage when competing in the UK market post Brexit.

For small trading companies in Ireland Brexit would have a number of effects including regulatory divergence with a main trade market, cost competitiveness and product sourcing issues, energy cost increases and possibly reductions in trade between Ireland and the UK. In addition to this, if euro/sterling moved to parity, as many commentators are predicting, this would leave the wage floor for Irish exporting firms at 29% higher in sterling than its UK equivalent.

When it comes to manufacturing wages Ireland there are at current exchange rates about £6 per hour higher than their UK counterparts. At a 90c exchange rate this would increase to £7.50. Wages in the Irish food manufacturing sector are the 6th highest in the EU and €5 per hour (14%) ahead of their UK counterparts (latest data 2012). A similar difference exists for overall personnel costs (13.7%) once social security costs are included. Given these differentials there is no doubt that Ireland is a very high cost location for the majority of food and drinks manufacturing companies and much higher than their UK counterparts.

Figure 8: Average wage and personnel costs per FTE in EU food manufacturing

Insurance Costs.

The rising cost of personal injury claims as a result of excessive judicial awards and a litigation culture is putting pressure on insurance premiums. A recently published report from Ibec found that average employer liability (EL) insurance premiums in 2015 for firms in the manufacturing sector were 1.6% of payroll. The report also found that across a range of minor injuries, Irish compensation guidelines are typically double that of the UK - and Irish court judgements are often far higher than the guidelines. This is reflected in the report which found that the average annual cost of EL insurance (expressed as a proportion of payroll) rising by 5% in 2012, remaining static for the following two years, and then rising by a further 7% in 2015.

Capital costs

The second largest cost item for many food and drink manufacturing businesses is the cost of capital. This can take up between 11 and 25% of a company’s total cost base. Central Bank research (2016) has shown that adjusting for company specific variables such as turnover size and change, sector, age and numbers employed that Irish companies paid a significant interest rate premium when compared to similar companies in most other EU countries.

Compared to their UK counterparts Irish firms paid an interest rate premium of over 1% once other factors has been adjusted for adding significantly to their cost of capital and expansion costs within the Irish market.

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