We have with us today representatives of IBEC to discuss the cost of regulation to business, in particular, small and medium enterprises, and proposals to reduce that cost. We will also hear from IBEC on the performance of the relevant regulators and the effectiveness of the consultancy process. On behalf of the joint committee, I welcome Mr. Pat Delaney, director of sectors enterprise and regional policy. Before we begin, I draw attention to the fact that while members of the committee have absolute privilege, the same privilege does not apply to witnesses appearing before the committee. Members are reminded of the long-standing parliamentary practice to the effect that they should not comment on, criticise or make charges against a person outside the Houses or an official by name or in such a way as to make him or her identifiable. I ask Mr. Delaney to proceed with the presentation.
Cost of Regulation to Business: Discussion with IBEC.
Mr. Pat Delaney
On a number of occasions we have had the pleasure of talking to the joint committee about this issue. It is not my intention to go over old ground but to bring members up to date on our view of how matters are emerging. I am happy to say that since we last had the opportunity to meet the committee, matters have improved. With regard to the Department of Enterprise, Trade and Employment, some very good work is being done on the issue of the administrative burden. The approach taken by the better regulation group to examine specific issues raised by the business community has yielded positive results across a range of areas.
On the White Paper, the principles set out of necessity — effectiveness, proportionality, transparency, accountability and consistency — tend to be the benchmarks against which IBEC and the members of the various sectors view progress. On the issue of design, there has been an improvement. There have also been positives on the implementation and review sides, but with regard to the administrative burden, without a standard cost model approach, it is difficult to quantify the savings in a reduction in costs to business, small business in particular. We know from European reports that within the Irish economy the estimated figure is between 2% and 3% of GDP, which would put the cost somewhere between €300 million and €400 million in these specific areas.
The introduction of regulatory impact assessments has been welcomed but not to the extent that we would have wished. There has been a moderation of the Statute Book which is positive. We are now at a stage where we are beginning to engage in a with or without test of the forms businesses have to complete. This is particularly important because following a similar exercise in the United Kingdom, the number of core forms in which businesses had to furnish information was reduced by approximately 3,000. We are also seeing progress in the regulatory mapping exercise, which is important to this agenda.
Overall, on the score card, there is work in progress and some positives on which to report. How we quantify the progress we are making on the standard cost model and the absence thereof is a problem in seeking to reap the benefits from a cost perspective. The benefits to small business are being reasonably well received, although it is always difficult to tell on the ground. However, I have no doubt that over time the work being undertaken by the better regulation group in the Department will yield substantial results and benefits, but we would like to see these results and benefits being quantified from a cost savings perspective.
I thank Mr. Delaney for coming before the joint committee. He mentioned a standard cost model. Are similar models used in other countries that could be adapted in an Irish context to quantify the specific cost of regulation in the SME sector across all business areas? Also, in terms of the practical implications, has IBEC had discussions with the Department of Finance, the Revenue Commissioners, the Companies Registration Office and the Central Statistics Office on the duplication of forms? As Mr. Delaney is aware, a business will have to submit a PAYE form at one time of the month and a VAT form at another. It will file corporation tax returns, as well as returns to the CSO and the Companies Registration Office. Has consideration been given to amalgamating these forms as much as possible and having a central office to which they would be submitted? That would cut the cost of regulation enormously, particularly for small business.
I saw what occurred during my years in practice. People in business, particularly small business, found that they were spending half their day dealing with the regulatory requirements. Did it bring about better controls? I am not certain at times. If there was one rather than numerous forms to be completed, would we get a more accurate picture?
To move slightly outside this area, the latest Mazars report on SME credit was published yesterday. I am anxious to hear Mr. Delaney's observations on it and the fact that the level of credit to SMEs was lower in the last quarter than in the third quarter of 2009. The way the report was prepared means that in many cases there is no breakdown between new and existing lending or between overdrafts and loans. The products are grouped together. What is Mr. Delaney's view on the availability of credit to the SME sector? These are his constituents or the people he represents. Does he see viable businesses failing, not because they are not profitable but because of the lack of credit flow?
Mr. Pat Delaney
I will deal with the issue of SME credit separately; I will be delighted to comment on it. On the first point about a standard cost model, this is normal procedure across the European Union. It is brought forward by the Union as the right approach across all member states, but there is a reluctance in this jurisdiction to adopt it. There would be some start-up costs associated with it, but it would be definitive once the model was in place. It works across the rest of the Union and is very clear in quantifying the cost of legislation. It is an effective tool for measuring both the cost savings and the lessening of regulation on business.
Why is there such a reluctance? Where they have been introduced in other countries, has there been a stark quantifiable cost?
Mr. Pat Delaney
There is an overhead and a head count issue. It is recognised by everyone in the discussions we have had that, as with anything worth doing, changes must be made and that of necessity people will have to be put in place to run the model. As regards the approach being taken across Departments, the Department of the Taoiseach is the lead Department on regulation. The Department of Finance obviously has clear views on where it wants public funds to be spent and a standard cost model for regulation is not something it wishes to put in place at present. However, if we are serious about this issue, given the impact regulatory and administrative burdens have on business and their cost at between 2% and 3% of GDP, it is worth doing something about it. Every other country has done it and each of these countries recognises that there is a very significant benefit. It provides for clarity, measurement and a valuation. It also offers an opportunity to engage in a review and the mapping process I mentioned can be carried out in a more fundamental way.
The with or without test which has been so successful in the United Kingdom can be documented and completed. One ends up with a Statute Book that is fit for purpose, whereby every regulation contained in it has a contribution to make and there is a clear understanding of the reasons rules and regulations are in place and their purpose. It also places the risk base assessment at a higher level in terms of the type of legislation to be put in place and the risk associated with it. This is particularly important in the case of small business. Many small businesses have to follow regulations, despite there being no risk from small business. It can be a very useful tool in that regard. Notwithstanding this — this to some degree may continue to be an idealistic difference — the issue of regulation is well worth focusing on.
On the point the Deputy made about small companies, I have had a similar experience in representing small companies. In a small company employing eight people half of the time of one person will be spent in simply filling in forms. To quantify this — I recall writing about the issue some years ago — it is equivalent to the output of 50,000 people in an economy. As members will be aware, in small business the availability of management time and resources is a critical issue. Apart from the cost, in a small business an owner-manager must be all things; anything that unnecessarily takes away time from running the business is a deterrent to that business being efficient and effective. Ultimately, it lessens the chance of survival and expansion.
What would it cost to set up such a standard cost model? Has it been quantified?
Mr. Pat Delaney
Yes. According to the figure I received from the Department and the group on better regulation, the head count was approximately 26.
Turning to the issue of SME credit, I read the report issued yesterday with interest. It would be easy to present a situation where one might think this was Paradise Lost for small business. It was never easy and perhaps never will be as easy again to start a small business. Credit for small business has been at the forefront in representations made by small business groups for the last 20 or 30 years. In fact, during my time representing small business I recall advising people daily that if they wanted money to start a business, they should approach a financial institution and ask for money to buy a car because one might get the money to buy a car but one certainly would not get it to start a business. It was always tough.
What happened in the intervening period was that as the economy began to expand and there was a rush of what we now see was very cheap money across the world, small business had more access. There were two reasons for this. There was finally a recognition that small businesses were different because the people who ran them took risks with their own money. Second, they created jobs — the more jobs there are, the more sustainable the economy becomes. We cannot lose this. Small businesses are just as systemic to the economy as the financial institutions. If we lose the entrepreneurial spirit that has developed in the past ten or 12 years, it will be a great pity. In the past decade we have seen formations of approximately 17,000 a year. On average, in a five year period, Ireland's business failure rate among small business start-ups is approximately 45%; therefore, for every 17,000 start-ups, 45% will fail.
There is an issue with regard to selection and there are associated risks. When money was freely available, these risks were easier to take. I am anxious to be fair and present a balanced approach because there are issues on both sides with regard to capital which is scarce and where and to whom one should lend it. In the 1980s and up to the mid-1990s small businesses paid a very high premium for funds, in some cases between 4% and 5% for the funds available. The availability of funds for some businesses is more important than the price. Availability keeps one in the game and one can hope things might improve.
What is the current position on business lending? It is clear that the level of credit will not and probably cannot return to where it was. Credit will be in short supply and small businesses will be at the wrong end of the supply chain. As a consequence, small businesses that cannot gain access to working capital will not be able to pay their creditors who, in turn, will not be able to pay their creditors. We will end up in a seriously poor situation. Alongside that, small business have the view that many things are happening in financial institutions, so why can we not take an approach which demands financial institutions to free up capital? The budget did that to some degree. We would like to see what the Minister announced on budget day — some €3 billion from each of the major banks being made available for SME credit — going some way towards resolving this. The difficulty we are now faced with is that, having a crisis in our financial institutions and the requirement for an economic policy which sustains the businesses we have, they must both be parallel. Restructuring the financial institutions and refinancing the banks will only work if we have an economic policy which is in tandem with that in order to get economic recovery.
Economic recovery depends on two things. First, it must primarily be export-led because we have to trade and we export 84% of everything we produce. Second, on the other hand, we must find some way of revitalising the domestic economy because the savings ratio is now nudging up towards 13%, when ideally we would like to see it between 7% and 8%. Those are the twin challenges therefore. If we simply do one side of it and put money into refinancing the banks, there will be a colander effect with money draining out when it is put in. In that way, one will not get the economic multiplier that one would normally seek and expect. Both these things must happen in tandem.
For small businesses the word "viable" is the critical issue. Anybody overseeing a small business, such as a manager or business partner — particularly a financial partner — will want to, and should, ensure that the money is being used for the best economic return one can get. It should be used for productive investment, so one is not simply lending money for people to pay rent because the future will not be in that. One must get a multiplier from the money that is available for lending. That money is clearly less. Given the ratios the banks have to work with, there will have to be a new realism about the amount of money available, not just to small business but also to individuals and the economy generally.
Since the start of January, our own figures show that 469 businesses have been placed in liquidation. Some 67,000 more people will lose their jobs this year and the impairment on mortgages for individuals is about 3.6% of all mortgages. In the context of the economic recovery, former construction workers now total about 133,000 and there are a further 45,000 former retail workers. It is clear they will not be returning to those sectors. At the same time, when we talk about having an economic model based on a knowledge economy, we are forecasting a skills deficit. There is a clear issue here that must be dealt with. We must move those 180,000 people to be retrained quickly. People who may be doing jobs they can do, must also be retrained upwards. That is a significant challenge but it is one we must face. Training and investment in people's development will be critical issues for how we deal with the circumstances we are in. Investment and training will give us those skills increases, which will help to get us into a higher output, thus making us more competitive. That is vital for an economy that must export.
The SME sector has a strong and legitimate case because it is systemic to the development and sustainability of the economy. It concerns the extent of funds and the competing demands for them. On a level playing field, which is what everyone wants to see, small businesses should not be placed in the position they were in a decade ago when paying horrendous margins for funds. That would discourage entrepreneurship, close more companies and cost more jobs. Jobs will be the dynamic which will return us to some form of growth.
I wish to refer to one or two points. Mr. Delaney said the SME sector is systemic to the economy. We have heard discussion about various banks being systemic, but the SME sector is absolutely vital. Does Mr. Delaney agree there was free availability of credit from the banks? In many cases this was asset-backed, so if someone went to the bank seeking funds, the bank would invariably ask for some security. At times, there was not proper scrutiny of business proposals. In some cases those businesses were over-trading and had insufficient working capital. Effectively, for their own purposes in terms of shrinking their balance sheets, the banks have pulled back on overdraft facilities for a range of businesses. The danger is that banks are getting a buffer zone with NAMA, which is being put in to improve credit availability for the banks themselves. In addition, they can go to the ECB to get cheap funds. Do the banks not have a role to play in bringing the economy through, in a partnership model, with the systemic SME sector for a period to ensure credit is made available in such cases? There have been 469 liquidations since the start of this year, according to IBEC, which I estimate is roughly 30 per week. In addition, 67,000 jobs will go over the course of this year, which is pretty horrific.
Fine Gael has put forward the NewEra document and a range of other measures to ensure there will be a jobs strategy. How does Mr. Delaney see the Government's policy in terms of an active strategy to get the real economy moving and create jobs?
Does Mr. Delaney believe a Government guarantee scheme is needed? Fine Gael has proposed the creation of a recovery bank, which would be a risk-sharing model in the form of a guarantee. Is there a need for such a model to be put in place for the SME sector? I note that ISME has major difficulty with the Mazars report. Does Mr. Delaney share those concerns?
Mr. Pat Delaney
There are two parallel pieces to this matter. A critical issue for us is how the rest of the world views us. One fundamental thing that every man, woman and child needs to understand is that the cost of funds to Ireland is particularly high. It is now at about 164 basis points. Putting that into perspective, if any financial institution suggested to an individual that they were going to put their mortgage repayments up by 1.6% because they thought they were a bad risk, the bad risk would ask "How do I make myself a good risk?" That is a question being asked of us as a country. The way to do that is to become more competitive, which requires us to reduce all our costs substantially. Over the past decade when the economy was expanding by 8%, 9% or 10% annually, a lot of cost increases went uncontested right across this economy. Unfortunately, many of them are administrative prices, which the Government itself has a responsibility to oversee. They include local authorities, waste water, environmental costs, energy costs and commercial rates. All of these things dictate price points. As I said, when exports account for 84% of everything produced, prices are important.
Wages in Ireland are 134% of the EU average, while prices are 116% of the EU average. There is a fair margin that has to be examined in that regard. The fundamental issue for us is that our cost base is too high. People will argue, and they have a legitimate case, that the cost of services we are buying within the country are also too high, so we must get a readjustment. That realignment will have to take place throughout the entire economy. Nominal wages, input prices and administrative prices must fall and the cost of running the country must fall also to get us back to a position where we can put ourselves forward into the world stating that we are a good credit risk, we are the same credit risk as Germany and we want money at the same price as Germany.
The cost to us of paying 1.6% above the German bond for funds is approximately €4 billion over a ten-year period when one is borrowing as much as we are. Surprisingly, that is exactly the amount of money that the Minister is suggesting he must find this year against a backdrop, perhaps, of guarantees of running the public sector at costs which have become embedded.
That will not be easy but it must be tackled. The competitiveness issue will never be more than one foot away from us here. Everything that we do in this economy to make ourselves less competitive will mean that we will have fewer jobs, as a result transfer payments will increase and, ultimately, taxes will increase because borrowing, no more than the other instruments, will not be available to us. This, in effect, will lead to the economy eating itself because the smaller the economy gets the more taxes must increase, with more taxes there will be less output and as a consequence, there will be less taxes.
On the issue of what we do domestically, a loan guarantee is a good idea. More important than the idea of having a loan guarantee is the availability of funds for companies. I can give two or three examples of that.
The operational programme for small business, which was introduced in the mid-1990s, for the first time provided a tranche of funds, of approximately €100 million, to small business which guaranteed the interest rate over a fixed term. Projects which could not have been funded at the level at which banks were clearing at the time suddenly became worthwhile and as a consequence, got off the ground. That was followed up by the Government with another fund of €300 million. Both of these funds were oversubscribed.
Examples like this indicate that small businesses want to invest but the cost is critical and the return on the capital is critical as well. Any business will state that when one is looking at scarce capital, one will go where one gets the most return on it. Unfortunately, the banks do not have a great deal of capital either and they will choose projects which make the highest return on capital to them. Getting a space whereby an accommodation can be made for small business is something that the Legislature can do effectively. Given the current relationship between the Government and financial institutions, it could be done quite easily. In freeing up credit, of itself, and in freeing up working capital, choices must still be made.
The word "viable" is critical to this provision of funds to companies which will put them into productive investment. Deputy O'Donnell spoke about the impaired balance sheets of many small businesses. In the good times over the past ten years small businesses did extremely well and created 580,000 jobs in this economy. Unfortunately, the profits made by small business in the main were invested not in capital expenditure but in property, as was the case in every other part of this economy. As a consequence, there is much property on the balance sheets of small business as well as every other business, with no liquidity and values which are extremely difficult to ascertain. Many owner-managers find themselves in a situation where they were thinking they would perhaps retire and have a nice retirement, and that opportunity is gone. The assets are sweated, the need for capital investment has never been more important and the availability of capital to invest has never been so scarce.
The one thing that will help us through this is an understanding of the key relationship, which is how capital, skills and knowledge, interrelate with one another. If capital is properly applied, the innovation, that is the knowledge base and the skills base which is the output, will get higher levels of productivity. Higher levels of productivity will reduce costs and improve competitiveness which, ultimately, will help us sell more.
I join in welcoming Mr. Delaney to the committee. I return to the regulatory burden and the €300 million to €400 million estimated cost of regulation to small businesses. He stated that the process ongoing is positive. It sounds as if he hopes there will be a positive outcome. In practical terms I wonder whether, for instance, the taxation burden to small businesses is seen as one of those inputs into reducing the cost burden, and whether, for instance, matters such as health and safety rules and regulations are part of that cost burden, and also the sub-contracting element.
I suppose I am tacking slightly differently on the sub-contracting issue. One of the issues arising is the inability of sub-contractors to collect on invoices. It appears that there does not seem to be a set of rules on obligations in that sense and many small businesses have been left high and dry by bigger contractors. Would a regulatory framework cover that relationship also? When the small guys, particularly those in the construction industry who sub-contracted for the bigger construction firms were left swinging in the wind when they came to collect their money, they were told in no uncertain terms where to go and where they were in the pecking order. Is that covered in the regulatory burden as well in terms of rules and regulations that could be put in place?
I mention health and safety as a regulatory burden because the regulatory burden on small businesses, especially in the food industry is particularly onerous. Under HACCP legislation the HSE is bearing down on them like a ton of bricks in pursuit of small menial type jobs and it places a cost burden on those businesses that one does not see in other countries. Has that been explored?
I mention the tax burden because two small businesses with which I have dealt, which have met their VAT obligations, for instance, for the 12 month period, because the preliminary payment was underpaid found that they had to pay the interest on that thereafter. That too is something that needs to be overhauled. All of these are cost inputs for the business into the future, regardless of what type of business one runs. We cannot look at the regulatory framework without looking at those cost burdens that businesses must bear.
Perhaps I am tacking slightly away from the substantive issue before us but the small business sector has become a soft target for revenue collection in the absence of being able to collect it from the traditional sources. I would welcome IBEC's view on it. The burden has been shifted considerably towards this system. When I look at small businesses, particularly family-run businesses which are operating today, which have operated intergenerationally, and which have also cut their cloth to measure, I see that the burden being placed on them through increased regulation is stifling them. Perhaps Mr. Delaney would give a view on that.
On the country that we should emulate, is there a suggestion that the UK is the benchmark by which we should operate? Is there something from a legislative point of view this committee should take on board which would affect regulation and which would reduce that burden if necessary?
Mr. Pat Delaney
The Government has signed up to EU legislation which requires it to reduce the administrative burden by 25% by 2012. As stated, measuring this will be problematic. I have no doubt positive work is being done. However, administrative burdens remain a substantial problem. I will deal with the specific points raised by the Deputy, but I must first state it is the scope, extent and impact of the totality of this burden which impinge on small business. As stated, the measurement I carried out suggested the output of 49,000 people was required to provide this information.
I do not necessarily believe less regulation is required. Better regulation is the key. That is going to have to be considered in the context of the issues of design, implementation and existing legislation. We should adopt a thorough approach to this matter. If something is not fit for purpose and no longer fulfils a role, it should be replaced. In the Netherlands it is not possible to introduce a new regulation unless an existing one is removed. That system appears to work very well. Under it, those who wish to introduce new regulations are obliged to choose those which must be dropped in order that they might proceed. Everything becomes consolidated as a result. That is not necessarily bad.
For small businesses, the various changes in taxation law — whether they relate to corporate or capital taxes — have been extremely positive, particularly in respect of companies in the services sector. Before the reduction in the rate of corporation tax, those companies would have paid the tax at a rate of 40%. Given that, traditionally, owners' equity in this country was particularly weak and that it was impossible to attract capital, if a company survived for the first two or three years, one would have expected that it would have progressed to a growth pattern thereafter, but with a tax rate of 40%, that became impossible. There was a significant debt overhang within many of these companies and, consequently, they did not grow. Those which did became lifestyle companies. This was because the entrepreneurs who owned them were of the view that if their operations became any bigger, the return on them would not increase to a substantial degree. They were also of the opinion that they were being squeezed out of existence as a result of the regulatory and financial burdens being imposed.
The Deputy referred to the building sector. As he is aware, there is legislation in place which deals with late payments. Companies do not, perhaps, use this legislation in the way they should. It is difficult for small companies to use it because they are price takers, rather than price makers. The dominant partner in the relationship will decide what is going to be included in the contract. The late payments legislation which suggests one should receive payment after 30 days only comes into play when a contract becomes impaired. The most recent figures indicate that the figure in this regard is actually 57 days and increasing.
There is an important clause in the legislation to which I refer which would be useful to small businesses in their dealings on a subcontractual basis. I refer to the retention of title clause, under which one retains anything that is worth retaining. I am not sure how this works in the construction sector, but in terms of goods sold, it may be of some use. The tradition within the construction sector is that the subcontractor is not paid until the main contractor pays the chief subcontractor and on down. When one is paid depends on the position one occupies on the pyramid. That system never worked and should never have been put in place. However, it was sustained by those involved in the sector. The entire basis for business within it relates to staged payments.
I presume the Construction Industry Federation comes under the IBEC umbrella.
Mr. Pat Delaney
No, that is not the case.
I presume there are large contractors, construction interests or suppliers to the trade who come under that umbrella.
Mr. Pat Delaney
Yes, we have the Building Materials Federation.
I raise this matter as I am of the view that the late payments legislation is not worth the paper on which it is written. If one is a small contractor in north Cork, doing work for a major construction company and tries to use that legislation in order to pursue it for payment, it is the case that one will never work in that part of the country again. In the context of relationships among businesses which are represented by groups such as IBEC and the CIF, surely a voluntary mechanism could be put in place in order to ensure smaller interests would be paid. That is not happening and such interests are being squeezed out. When we refer to the lifeblood of the economy, we must remember that small contractors have kept things going on a local level and provided much employment. I sense that the legislation is not really effective and that the groups which represent the people concerned such as IBEC must come forward with proposals to progress the matter.
Mr. Pat Delaney
I am trying to underpin, not undermine, the Deputy's argument.
I appreciate that.
Mr. Pat Delaney
Across many of the sectors we represent, we have signed agreements in principle with companies which will commit to pay. One of the key issues that has arisen in the dialogue between Members of the Oireachtas and small firms is that the Government should fulfil its commitment to pay within a period of 15 days. That would have an extremely beneficial effect right down the line. It is not that people will not pay, in many cases. They are willing to pay once they are paid what they are owed. The dilemma is that A cannot pay B until he or she is paid by C. The critical aspect of the role of the banks is that they should free up credit. No one is suggesting companies should extend credit to those to whom such credit has been extended. That is a management issue for companies. Neither is anyone suggesting small companies, in particular, should enter arrangements which it is clear are not in their interests, particularly when legislation which they can invoke is in place. The power of that relationship will be the determining factor. In circumstances where companies are not paid it is difficult for business organisations to put themselves above the law. The legislation relating to payments is clear. It is also clear on the level of interest that can be paid and where the responsibilities within a contract lie. Furthermore, people are free to enter into contracts outside the norms outlined in the legislation. It is only when such contracts fail that the legislation is brought to bear.
I respect the point the Deputy is making to the effect that small companies can find themselves in situations where they cannot say no in circumstances where someone says they will pay in 70 days. However, that can be factored into the costs of the arrangement. In such circumstances it is the cost of working capital that will cause most concern for the company involved. Companies which allow others to use their money to run their businesses are not going to remain in operation for long. It then becomes an issue of management, analysis of debtors and risk assessment in the context of those to whom one supplies. There are many factors involved in this regard.
I am aware from experience — I am sure members have been provided with evidence in this regard from their constituents — that entering into arrangements with certain individuals or companies can be detrimental to one's business. It is advisable not to enter into such arrangements but desperate people do desperate things. We sometimes live in hope in circumstances where we should be carrying out a proper analysis and making decisions not to undertake certain business ventures.
I take Mr. Delaney's point. People operate their businesses and enter into contracts primarily on the basis of good faith. That is particularly the case for small contractors entering into arrangements with reputable firms. For example, if one is going into business with a so-called blue chip construction firm, one can take it on good faith that, based on the law of averages, one should receive payment for one's endeavours. No one is suggesting representatives of such small businesses should act as if they were above the law. However, there is a school of thought that suggests that they would better represent the various interests by seeking to put pressure on people they worked for or subcontracted to and there is a sense the small guy is not getting the representation he should. Mr. Delaney might not accept that but sometimes the small guy cannot put his head above the parapet because if he does, he is gone.
Mr. Pat Delaney
I understand more clearly the point the Deputy is making. The issues he raised are part of the our work every minute of every day and they have been for years. All our constituents, particularly in the small business sector, would freely enter dialogue of that type. We have also published many books to help companies on how to get paid and run various management and credit control courses but we also intervene on a daily basis with financial institutions and people who are owed money and put companies in position with the best advice available to them on how they can secure what is owing. We suggest to companies that before they do business with anybody, they spend €45 to have a credit check done. They will receive a statement on the state the other business is in and on the likelihood that they will get paid. This is good practice, certainly for companies writing new business where they might not have a relationship.
Bad debts are not a substantial feature of small companies, although late payment is, but eventually people pay. Any analysis of small companies will show that where there are good faith relationships, people want to pay up and they want to make the effort. There is a peculiarity in Ireland about paying. The 469 companies that, unfortunately, have gone out of business may not be in a position to do so. Genuinely, people recognise the need to pay their creditors. It is one of the peculiarities of Ireland that the first thing people do every month is pay their mortgage whether or not they can afford to. Paying bills in business is part of that as well but, without working capital and a flow of credit, a company will not be able to do that if other companies are in a similar situation for all the goodwill that might exist.
With regard to business organisations helping companies to secure funds and debts, it is part and parcel of our daily life and we do it willingly and, I like to think, successfully.
Mr. Delaney mentioned 133,000 job losses in the construction industry and 145,000 in the retail sector. There is a great deal of debate currently about the smart economy and the concept of upskilling but vague language is being used. How can we get these people back to work, particularly those who worked in the construction industry and who have a skill set because nothing will be built in the near future? One school of thought is that a massive stock of older houses need upgrading and that process could be incentivised through retrofits and so on. Is it realistic in IBEC's view that many of these guys can be pooled and put back to work in that sector? These are dramatic figures. Not all of the former retail workers will return to the retail sector because that is demand-led and so on.
Reference is repeatedly made to high-end services, upskilling, fourth level education, start-up companies and so on but that will only take up some of the slack. From a businessman's perspective, where does Mr. Delaney see potential for this country in the future?
Mr. Pat Delaney
There are a few good examples in Scotland. Scotland had a significant construction recession in the late 1980s-early 1990s. Many middle aged and young craftsmen could not find work in the country and there was not much to do anywhere else but, uniquely, a retail chain came up with an idea. It was employing people with good sales skills but they did not know anything about the product and, therefore, they decided to hire the former construction workers. The company is B&Q, which is a DIY store, and customers found when they came in they were speaking to experts rather than to someone who did not necessarily want to talk to them or who was not in a position to give them advice.
We have in sectors of the economy graduates who are working in jobs in which they could take on more responsibilities at a higher level. We need to free them from those jobs and replace them with workers displaced from other sectors. We must also be mindful of future labour demand in the construction and retail sectors. Currently, that may not be positive but the retail sector expanded by 304% in terms of floor space over the past ten years while consumer spending increased by 29%. Contraction was always going to happen once the economy stalled. We need to continue to conduct manpower audits and skills audits, in particular, and not just of the skills we will need, which we always have to be mindful of, but it would be useful to find out the skills we have. We do not always document that to the level we should and the consequences of that were highlighted during the building boom when we needed 300,000 overseas workers, many of whom worked in the construction sector, which at the time was responsible for approximately 25% of GDP. That was never sustainable and the sector will never return to that level of output.
The challenge is to look for the opportunities. If the economy is to be knowledge-based, we must make better use of graduates. In that context it is important the graduates we are producing find an opportunity to give expression to skills they have. One important aspect of what we are doing is the introduction of our GradLink programme this year, which will place almost 400 graduates who, in other circumstances, might not have had an opportunity to gain employment here but they will be placed with employers who will give them an opportunity to develop their skills. That type of response is necessary on a broader level from the State agencies and in Government policy, in particular, to encourage companies to take on graduates. If we do not, we will lose the education investment and if we have high unemployment, it could become long-term, health care costs and social housing programmes would increase, crime levels would increase and various attendant social problems would emerge. I do not say they should be priorities for any other reason but getting graduates into work is an important part of that. Freeing them from jobs in which they can be replaced by other people is another aspect of it. Investing substantially in training to increase skill levels is vital.
I thank Mr. Delaney for attending. I refer back to the issue of the cost of regulation. Businesses have been talking about, and politicians have been discussing, the administrative burden of regulation and the cost of red tape for as long as I can remember, and politicians have always paid lip service to doing something about it but little has been done. In 2006 Fine Gael and the Labour Party had a joint policy on the administrative cost of regulation more or less adopting a standard cost model and so on. In my role as spokesperson on enterprise, I pursued the Minister and was influential in getting him to commit to a target, which eventually turned out to be 25%. However, we still do not know what makes up 100%, so how can we reduce it by 25%. There have been some forums held and some regulatory impact assessments conducted, but these have been unimpressive because they have not included figures. Therefore, I do not see the point in doing them. I am at the stage where I am tired of hearing this being discussed and of committees and forums about it. I want to know what can be done to reduce the cost of regulation. We all agree we are not talking about reducing regulation, but the administrative burden of it.
I have five basic questions in this regard. Does IBEC think we should adopt the international standards cost model as the means of calculating the baseline cost of regulation? Mr. Delaney may have addressed this issue before I came in, but does he have a view on the recent Forfás paper with regard to having a single window or portal option for regulation? He mentioned sunset clauses and the one-for-one exchanges that happen in other countries. Would he advocate these when it comes to regulation in this State? Fine Gael has been considering an idea used in other countries, but perhaps IBEC has not looked at it. This is the idea of having a single inspectorate. We have a plethora of agencies that can inspect businesses currently, whether the HSE, the local authority, the EPA, SEI, the HSA or NERA etc. People from all of these agencies can turn up to inspect a business for different reasons. While from the back office point of view these agencies are separate and do their own thing, there is a compelling case for having a single inspectorate regime where the inspection would be done by one or two multitasking persons who could do it in one go. We have examples of countries that have a single inspectorate system. Has IBEC considered this or does it have a view on it?
Mr. Pat Delaney
I addressed the issue of the standard cost model and we agree emphatically that it is the right approach to take. It is the preferred option of the Commission that member states embrace the standard cost model. It provides clarity about costs. Currently the cost is between 2% and 3% of GDP in any one year.
That could be, give or take, €1.6 billion.
Mr. Pat Delaney
Yes. On the sunset clauses and the one-for-one approach, IBEC, as a business organisation, and businesses generally all accept we need regulation. Society needs regulation and regulation of itself need not be something bad. It is where people feel regulation impinges or takes away or where there is duplication that is a key issue. There is also a problem with feedback between the providers and users of information. The users never tell the provider what happened or how important it was or any positives attached to it. If users sent a report on what happened to the providers' input, that might be useful. That would let them know what information the users garnered as a result of the providers' input and the decisions that may flow from it.
The single inspectorate is a very interesting idea, if only we could find somebody with all the specialisms required, for labour law, health and safety etc. Given there are 29 pieces of primary legislation an employer must comply with in order to employ somebody plus the taxation checks, it does not seem feasible that Revenue audits could be carried out by someone on a more general basis.
With regard to consumer protection in the food sector, while the regulations are very onerous, there are specific specialisms required such as when people need to evaluate how well machinery is maintained. This may need to be done not from a health and safety perspective, but from a public health perspective. Otherwise, the single inspectorate is a splendid idea and it would find widespread support among the business community. If businesses knew that on a particular day or once a year or once every three years they would have an inspection, they would not have a difficulty with that and they would prepare properly for it. That would benefit everyone and it would be a benchmark. Currently, in businesses, particularly owner-managed businesses, it is the owner-manager who must deal with all the issues because he or she will not let anyone else deal with them. He or she wants to be the one to be there and engage with the inspector, whoever it is. This is difficult when time is scarce and where the pressures under which small businesses currently operate are so pressing.
I said at the outset that we made various submissions to this committee and suggested that it is now probably the time for reflection. Some changes have taken place. The work that is being done by the better regulation group in the Department of Enterprise, Trade and Employment is having an effect. This may be only marginal, but nevertheless some changes are being achieved. The approach being taken is that the group is examining ten or 15 key regulations and doing whatever it can to make improvements. More broadly, the absence of a standard cost model leaves us at a significant disadvantage to other European economies, because we will not know how efficient or effective we are at dealing with this issue until we share the same basis of measurement as other countries.
Did Mr. Delaney have a chance to consider the Forfás paper which was published recently?
Mr. Pat Delaney
Yes, and I am all for one-stop shops because such shops are always beneficial. The issue surrounding this and other areas is the administrative burden is not the main issue currently. If we come back to consider this next year, we will find the administrative burden is not necessarily responsible for closing any businesses this year. The priorities this year are the issues we raised earlier, such as how to get credit flowing to small companies. If we can manage that, we will sustain those companies and they will create jobs. If they create jobs, we will get back to the happy situation where the administrative burden on them increases and we can more usefully talk about it then. This year, the administrative burden per se will not close any companies.
I thank Mr. Delaney and committee members. This meeting has been very worthwhile and we will get back to IBEC on the issues.