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Why we need more than low costs to be competitive

By John Simpson

Published 27/10/2015

Belfast is a hub for technology start-ups
Belfast is a hub for technology start-ups

Doing business in Northern Ireland is cheaper for companies than the average in the rest of the UK or Ireland. The cost of doing business in Northern Ireland compares favourably with equivalent costs in the rest of the UK. Local costs also compare favourably with those in the Republic of Ireland. The evidence has been collected by officials from the Department of Enterprise, Trade and Investment.

After a review of a range of different types of costs faced by businesses, Northern Ireland overall costs are estimated to be 16% lower than the average for the UK, and 5% lower in comparison with the Republic of Ireland.

The information needs to be considered alongside other independent data which suggests that, in terms of competitiveness, Northern Ireland lags behind both Great Britain and the Republic of Ireland.

In 2014, a professional assessment ranked Northern Ireland 42nd in an international league table, in which the UK was eighth and Ireland 27th.

The 2014 assessment of competitiveness has been updated for the NI Economic Advisory Group but the results have not yet been released.

If lower costs of doing business exist alongside other evidence that competitiveness is poorer, then a cautious reconciliation is merited. If doing business here costs less than in neighbouring areas, why would competitiveness compare unfavourably?

A likely explanation lies in the efficiency with which resources such as labour, energy, transport and working space are used. Simply using labour costs, which are 16% lower than the UK average and 10% lower than the Republic of Ireland average, if Northern Ireland is less competitive than these comparable areas, then the prospect is that comparing the cost of labour needs to be reconsidered to take account of lower output per head.

One assumption would be that productivity should be comparable for people with similar skills and costs. That assumption, easily made if qualifications and abilities are similar, does not necessarily hold from one region to another.

Is it possible that Northern Ireland has an unmeasured handicap in the output per employee, or what might be termed the work effort per employee? This difference poses serious questions for management effectiveness and individual responsiveness.

There are other indicators that point to this work effort gap.

The detailed review of how Northern Ireland performs as part of the knowledge economy throws interesting insights into the nature of UK/NI comparisons.

In a path-breaking exploration of the progress of Northern Ireland in implementing a emphasis on the need for, and merits of, a stronger knowledge-based economy, the Ulster University Centre for Economic Policy has drawn some relevant conclusions.

First, Northern Ireland is making modest progress in catching up with some of the average UK outcomes. Second, and critical to a productivity gap, Northern Ireland is no longer the worst-performing UK region, but, in an analysis of the 12 conventional regions, it is still well behind most of the others. The data published by UU points to placing NI as either eighth or ninth in this comparison.

That evidence highlights the progress being made but also emphasises the distance still to travel to get towards the upper end of the regional league table. In this context, a competitiveness gap is not really a surprise.

The knowledge economy index scores creditably for the increasing use of private equity investment and venture capital investment. It also shows a strong positive outcome for the number of patent applications submitted, and particularly the number of high technology patents being developed. Encouragingly, in addition, the scale of research and development spending is being maintained at a reasonable level.

However, in terms of the role of new business start-ups and the use of advanced science and technology graduates, we rank well down.

The contrast between competitiveness and costs of doing business is, therefore, not really a surprise. It is, undoubtedly, a frightening and continuing challenge.

Company report: Severfield (NI) Ltd

The former Enniskillen based Fisher Engineering was bought by Severfield-Rowan plc in 2007. In May 2014, the local firm was renamed as Severfield (NI) and is now a subsidiary of the English-based parent company.

The company specialises in constructional steelwork extending to design, fabrication and the erection of structural steelwork.

Trading results in 2014-15 show a steady recovery from those in the previous year. Turnover reached an annual peak of £67m in 2008. Then from 2008 to 2010, turnover fell sharply, reflected in a major reduction in operating and pre-tax profits. Turnover in 2011, at £59.9m, showed a good recovery but was still some £7m lower than the peak figure in 2008. 2014-15 turnover has stabilised at over £52.7m.

Trading conditions in 2014-15 are described as satisfactory. The directors comment that an improvement in activity levels is giving confidence that the company will deliver strong performance in the future.

Severfield (NI) has only a small reliance on external borrowed funds so operating and pre-tax profits are similar and recently show the same year to year changes.

Operating profits in 2014-15, at £3.5m, were the highest since 2012. Operating and pre-tax profits increased by over 200%.

In 2014-15, the company felt able to make dividend payments of £3m following a larger payment of £5m the previous year.

Most of the remaining post-tax profits were retained in the profit and loss account and the total value, at March 31 2015, of shareholders' funds increased marginally to £21.4m.

Average employment has been stable and was 284 people in 2014-15. This is close to its highest recent level, at 285, in 2009.

Belfast Telegraph

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