As the Northern Ireland economy wheezes its way out of intensive care, Cathy McCorry, Managing Director at the Grafton Employment Group Northern Ireland comments on what lies ahead for the recruitment and employment market

Undoubtedly the recent economic volatility has brought many changes to the recruitment and employment industry, with many employers throughout the province having reduced their recruitment requirements across a range of sectors.

However it was not all doom and gloom as in 2009, some sectors fared better than others. Some areas in particular have held up reasonably well including IT, Healthcare, Food & Drink and Pharmaceuticals.

While there is still a long way to go before sustainable economic growth becomes a reality, in recent months there has been a fresh impetus and the market has shown some modest signs of economic recovery and a return of business confidence. Across the Grafton Employment Group in Northern Ireland, available positions are up 7% compared to the previous six months. Those sectors charting pronounced increases in the supply of jobs have included IT and Customer Service.

Even after other aspects of the economy have recovered, unemployment is always a lagging factor in a recession and the recruitment and employment industry is one of the most exposed, as it depends on a healthy level of employment. As we have witnessed in Northern Ireland, the unemployment rate is up 0.7% over the year, whilst the number of persons in employment has increased by 2.4% in the same period.

Despite recruitment beginning to pick up, jobseekers across all sectors in Northern Ireland are still facing some of the toughest conditions for a decade, resulting in a ‘two-speed labour market’ A modest rise in recruitment has encouraged those in employment to have confidence to seek their next position. This is increasing competition for those out of employment and increasingly pitching employed and unemployed against each other in a two speed jobs market.

Employers on the other hand face a different challenge, ensuring their companies are prepared for growth when the economy does make the forecasted turnaround. Those employers that cut staffing levels extensively are taking a close look at the core skills needed in new hires to support growth once the economic recovery takes hold. When the economy blossoms again it will be those businesses who maintained operational effectiveness and customer care that will be first out of the blocks.

An interesting development is that there has been growth in demand for interim managers overseas. It is important to remember that some economies in Asia, the Middle East and South America have not been as badly affected by the recession as Western economies. Migrating for work has become part of Ireland’s history and so it is of no surprise that Northern Irish workers are not fazed by moving to another country for employment. The concern for employers here, however, is that the exodus of talent leaving Northern Ireland will have a significant long-term impact on the Northern Irish labour market.

Looking ahead, the imminent threat of public sector spending cuts is changing the face of the local employment market in a manner not seen since the decline of heavy manufacturing in the 1970s. While the private sector looks geared for growth the necessity for government and financial institutions to take very real and immediate action to support this growth is becoming paramount.

The EU’s Agency Workers Directive (AWD) which was approved by the EU Parliament in October 2008 is likely to have one of the biggest impacts on the Recruitment and Employment industry as it puts temporary agency workers on equal terms with permanent workers with regard to pay and conditions. This legislation needs careful consideration to avoid putting jobs at risk and so that it does not cause legal problems for employers or employees.

Overall the major difference between this recession and previous ones is that the recovery is expected to be slow and drawn out, therefore, the recovery in the economy will not bring immediate relief to the employment and recruitment market. Those sectors which look likely set to grow include pharmaceuticals, IT, engineering and the emerging green and renewable sector.

The positive news is that the recruitment and employment market will claw back lost ground incrementally and we are beginning to see encouraging signs of growth, which put simply is refreshingly good news for all concerned.

Post recession, the north-west commercial property market continues to forge ahead despite difficult economic conditions but there are a few rays of hope. Andrew Coggins, Investment Director at Osborne King, takes a closer look.

Widely acknowledged as a “gateway” city and regional hub of the northwest, Londonderry is Northern Ireland’s second city and the fourth largest on the island of Ireland. Derry also possesses the fastest growing population in Northern Ireland as well as having one of the comparatively youngest populations. The city’s significant higher and further education resources offer the potential for stimulating growth in knowledge-based industry, improving its skills base and attracting inward investment. To this end, a number of agencies and bodies are actively engaged in promoting the city in terms of economic, social and cultural regeneration. For example, in recent years, the Londonderry Port and Harbour Commission has invested £15 million in new infrastructure while other agencies have invested £13 million in a number of major cultural projects during the past eighteen months.

In common with other parts of Northern Ireland, the property market has endured extremely challenging times arising from the global recession. The most recent figures available from the University of Ulster, which relate to the 4th quarter of 2009, reveal that house prices on average for the Derry and Strabane areas stand at £149K – a marginal increase of 0.2%. This merely suggests, hopefully, that the residential market has bottomed out. The overall average house price reported for Coleraine/Limavady and the North Coast is £163K, which is slightly up on figures for the same period in ’08. The market received a significant boost when houses at Shackleton Barracks, Ballykelly sold out within a matter of hours when they went on sale last month. 317 houses formerly occupied by military personnel and ranging from £30,000 to £65,000 were snapped up by first-time buyers and investors, some of whom had camped out for over a week in order to secure what has to be the bargain of a life-time!

Office rents in Derry city centre range between £12 -14 per sq. ft., which is broadly in line with Belfast city centre rents. The office sector has remained relatively static witnessing little commercial development during the past year. The loss of 300 jobs at Stream International’s call centre in the city towards the end of 2009 was a major blow to the local economy; unfortunately, there is little sign of any significant inward investment required to re-stimulate both the office market and future job creation.

On a more positive note, Ilex, the co-ordinating body established to promote economic, social and physical regeneration within Londonderry and the surrounding area is busily channelling an estimated £33 million into a number of key projects involving the tourism, enterprise, education and arts / culture sectors.

Ilex is also charged specifically with managing the re-development of two former military bases, Ebrington and Fort George. The 26-acre site at Ebrington which is situated on the East Bank of the River Foyle is ear-marked for mixed-use re-development that will include residential accommodation and the construction of two new schools, Foyle and Londonderry College and Ebrington Primary School. Ilex’s master plan for Fort George, located on the Foyle’s West Bank, envisaged the creation of a prestige technological, knowledge-based park. The organisation is on course to realise this dream following the DSD’s recent hand-over of a new, purpose-built facility to Hibernia Atlantic, the transatlantic cable firm, enabling businesses across the north-west to access high-speed broadband communications with North America directly through a transatlantic communication network.

On the retail front, Foyleside Shopping Centre remains the city centre’s leading centre and a planning application for a further extension has recently been submitted, which will create c.235,000 sq ft of additional retail space, office accommodation and a multiplex cinema. Last month’s acquisition of the Richmond Centre by West Register Ltd, the “distressed assets” subsidiary of Royal Bank of Scotland ended a year-long period in administration and the centre’s future now seems more assured.

Derry and other towns in the region, most notably Strabane, continue to benefit from cross-border trade albeit this has slowed down in recent months due mainly to less favourable exchange rates. The “Asda effect” is still evident in Strabane, where the arrival of the superstore back in 2007 has led to other retailers following suit with new names including Sports Direct and Poundland recently opening for business in the area.

Across other parts of the north-west, the effects of the recession are still evident and with pressure on the public purse and spending cuts imminent, Derry and the north-west are unlikely to escape unscathed. Still, positive thinking and positive attitudes are needed more than ever and Derry’s achievement in making the shortlist for the UK’s first ever City of Culture bid is indicative of the spirit of creativity, flair and determination that characterises this part of the province. Becoming UK City of Culture 2013 would offer a huge confidence and morale boost whilst also delivering significant economic and social benefits that would have a lasting positive impact on the region.

A growing population means the impending need for improved and more efficient infrastructure. Economist John Simpson takes a look at ‘Infrastructure for an island population of 8 million’, a report backed by InterTradeIreland, which looks at how our infrastructure will need to develop over the next 20 years.

The Irish Academy of Engineering and Engineers Ireland have published a well informed professional assessment of the civil engineering needs of the island of Ireland in the next 20 years. This perspective is both useful and challenging. From this foundation, the next steps should fall to both Governments.

Today’s social and economic planners need to be reminded of the nearly inevitable consequences of an increasing population, the demands which come with higher living standards and the particular implications of all-island personal and commercial mobility and, in addition, the changing implications of climate change.

There is no surprise when engineers conclude that engineers should be asked to do bigger and better feats of engineering. That type of statement is a natural consequence of the ambitions of a group of modern highly-skilled professionals.
A review of the ambitions of the Irish Academy does suggest, as a caveat, that the ambition to have the best engineering solutions must be qualified with a distinction that optimal solutions are not always the most advanced or the most expensive. The engineers acknowledge the need for an ability to engage in economic appraisal as part of their training, alongside the requirements of environmental impact assessments.

The report makes two critical and fairly non-controversial demographic assumptions. First the population on this island will reach eight million in about 20 year’s time. Second, the patterns of living and working will mean that about 90% of the population will live within the commuting catchment of eight city regions based on Belfast, Derry/Londonderry, Sligo, Galway, Limerick, Cork, Waterford and Dublin.

The influence of the increased urbanisation of the population also translates into an even stronger role for the Belfast-Dublin corridor which, by 2030, will have a population of four million people and create its own infrastructure investment needs, including specific plans for subsidiary centres along this corridor.

The engineers explore the infrastructure needs of the island with particular emphasis on transport, energy and the environment. With about half the population of the island all in the eastern corridor, it is hardly surprising that the particular demands for roads, railways, water distribution and airport development loom large.

The report accepts the merits of economic assessments of proposals but does not offer any macro-economic judgements on how governments and public authorities should prioritise the investment programmes. From a Northern Ireland perspective, the Editorial Taskforce included senior staff from the Strategic Investment Board but no other officials currently in office.
High in the conclusions reached on different topics, the Taskforce recommended:

• Major upgrading of the Belfast-Dublin high speed rail link.
• Further investment, including four lane capacity, for the Belfast-Dublin motorway.
• An extensive water mains network linking the Shannon and Lough Neagh to Dublin and Belfast.
• High speed large capacity information highway linking all eight city regions, including fibre connections to homes.

One of the logical conclusions from the analysis is that demand for an adequate range of international airline services will develop at only one large airport and that will be expected to put pressure on Dublin airport. However, the engineers do add that the international airline hub at Dublin could be complemented by expansion at Belfast International Airport.
Reflecting the longer-term implications of climate change and the risks of adverse weather and changing sea levels, the Engineers have studied in detail the needs for major flood defence investment, particularly around the estuaries for the main ports. This shows that large areas in Belfast, Cork and Dublin must prepare defences against storm surges. For Dublin this includes a possible tidal barrier across Dublin bay.

Green policy issues prompt the engineers to offer ideas on extending the number of wind farms and associated investment in a more accessible grid. The suggestion that there should be a storage plan for 20% of the annual use of natural gas is consistent with the recent proposal by Islandmagee Storage for capacity on this scale near to Ballylumford.
In a further push to make the energy sector ‘greener’, the report commends the building of appropriately sized waste-to-energy plants strategically located in each of the city regions. The Belfast proposal, in 2009, was not accepted by the city council. This question is not so easily forgotten.

The engineers do not develop funding solutions to the capital required for the infrastructure programmes. They believe that innovative financing will be needed to top up the conventional financing in Government budgets.

One suggestion is that both governments might co-operate in setting up an infrastructure bank to provide long-term funding for infrastructure projects. This bank might draw funds from pension funds and the European Investment Bank.

The concept of an infrastructure bank is superficially attractive but would be difficult to implement, particularly with cross-border jurisdiction and dealing with two Governments and two currency regimes. Nevertheless, the aspiration that infrastructure plans might draw on a wider range of sources is both useful and necessary. A major effort to divorce capital projects that can generate their own revenue streams from conventional public sector funds will be needed.

Much of the investment in water and energy services can be sourced from the private sector, if governments restructure these utilities. Similarly, railway investment and motorway developments can be linked to revenue earning baselines. Some projects might lend themselves to public, private partnership, or PPP, funding arrangements.

Nevertheless, there is little doubt that, even with the use of innovative and alternative sources of funding, financing infrastructure programmes will be a critical constraint. The engineers argue, logically, that if this island is to be a competitive location for international business then the infrastructure programme is not an optional extra: it is a necessary condition.

Making an international comparison, the engineers conclude: “There is clear evidence that there is at present an infrastructural deficit on the island.”

Are the government ministers persuaded?
The Engineers have brought together impressive evidence of key infrastructure needs. Without taking away from the value of this exercise, it should be pointed out that this expensive catalogue is before any additions are made to allow for construction needed for housing, education and health.

The next stage for Northern Ireland should be a reformulated strategic investment programme developed in an improved operational format to help the Northern Ireland Executive prepare a more coherent 5-10 year perspective.

An upward revision in the UK’s gross domestic product for the fourth quarter of 2009 has prompted suggestions the economy is maybe in better shape than we first thought. Angela McGowan, Northern Bank Chief Economist, assesses our current economic health from a local perspective.

So where are we now?
Northern Bank research has shown that the local economy “technically” emerged from recession at the end of 2009. Unfortunately technical recovery refers only to the fact that the economy stopped contracting but masks the fact that local economic output is still nowhere near pre-recession levels.
Enormous levels of UK government intervention have managed to pull the economy back from the brink of disaster. Nonetheless the current recovery is a little uninspiring and policy makers will be treading a tight-rope in terms of balancing the scale and timing when it comes to pulling back their intervention.

Over 2010, the local economy is expected to grow at a mere 1.3% – with quarter 1 proving to be the most turbulent of all quarters. The prolonged cold snap in January will have dented economic activity for local retailers, the hospitality industry and manufacturing – but modest growth is expected during 2010. Downside risks exist but so too do growth opportunities.

Perhaps before we explore potential ups and downs in detail we should consider the phrase used by Shimon Peres, President of the State of Israel, at a World Economic Forum in Davos: “The optimist and the pessimist both die in the end, but each lives his life in a completely different way.”

Mixed signals
Global recovery can only be good for the local economy. As world trade recovers, Northern Ireland will benefit from the upsurge in demand and the impact that international growth would have on confidence. The global economy in 2010 is forecast to show a solid rebound. At the time of writing the Internal Monetary Fund’s most recent estimate suggests the world economy will bounce back with 4% this year and 4.3% in 2011. This growth will be led by emerging markets, but advanced economies are expected to drag down the overall recovery curve.

Manufacturing at the global level has been enjoying a good revival as companies restock and receive a boost from rising world trade. But the upturn has been less pronounced in some countries. The UK finally emerged from recession in Q4 last year and, even with the upwardly revised Gross Domestic Product levels (revised up from 0.1% to 0.3% in Q4 2009), worries remain about the country’s ability to sustain this upturn.

The words “double-dip” keep appearing in the media – but I am reluctant to use this term as it suggests that the economy will contract by the same or similar levels as last year and such a scenario is highly unlikely. If the UK output contracts again in the early part of 2010, the dip would be a very small one and should be temporary in nature – perhaps focusing on the medium term is more important as the UK is forecast to experience overall growth of 1 per cent in 2010.

In Euroland, the early part of 2010 has been marred by Greek debt problems and on top of this Spanish debt problems are most probably looming on the horizon. Germany, the Eurozone’s largest economy, is reported to have experienced a stall in its recovery in quarter 4 – although Construction sector sentiment jumped further upwards from 103.2 to 105.9. The strong increase in German construction sector sentiment is a clear indication their housing market is finally about to take off fuelled by the historically low interest rates.

Over the last few weeks economic and consumer sentiment has taken a slightly negative turn. After a strong recovery during 2009, the US consumer confidence index suffered a relatively large set-back falling from 56.5 to 46 in February. Consumer confidence also declined in the Eurozone in February – but only very marginally. However, not all news is bad! Purchasing Managers Index data indicate that the European rebound remains on track despite the disappointing Q4 GDP data. Thus the hope for a strong quarter 1 2010 is still alive. New orders currently signal GDP growth in Euroland of about 2% quarter-on-quarter annualized. Europe’s export engine is still at full speed. This should be enough to get domestic demand on the move and initiate the more sustainable recovery that we are all waiting for. It is essential that a recovery in private demand materialises before fiscal tightening kicks in. Otherwise we are about to see a very slow recovery in Euroland.

Downside risks: the problem with the recovery
Recovery for most advanced economies has initially been feeble – although the UK and US both experienced upward revisions to their latest growth rates. Fragile growth combined with high unemployment levels and weak earnings growth in many of the world’s major economies suggests that the consumer might be shy about taking over the reins of recovery. Nonetheless, national debt levels suggest many governments are looking to pull back on their support as soon as conditions allow. Unfortunately, because of the political nature of fiscal policy, a large degree of uncertainty surrounds the expectation that governments will choose the correct course of action. In the UK, Conservatives aspire to announce cuts in government spending in early summer, while Labour is determined not to put the recovery at risk – an approach which is probably more in tune with recommendations from the IMF and the reputable Institute of Fiscal Studies in the UK. A further downside risk stems from the fact the financial system has not yet been fixed. While financial conditions have improved, problems with financial structures and regulation have still not been resolved.

Reasons for optimism
Of course not all the news is bad. In particular, in Northern Ireland we have some of our own unique reasons for optimism. As the global economy picks up, so too will opportunities for the local economy. Weak sterling continues to provide support for both manufacturing exporters and border retailers.

Also, the housing market has stabilized. In addition, local economic policy in Northern Ireland looks set to be streamlined through one government department – so the potential for quicker and co-ordinated local policy responses is good. Furthermore the corporation tax debate is back on the table – with improved policy structures and a competitive corporation tax in Northern Ireland (and of course depending on how you look at things) the opportunities for economic growth in the longer term could be endless.

For those trading south of the border or further afield, movements in the value of sterling can have a huge impact on profit margins. James Beattie, relationship manager with First Trust Bank’s Global Treasury Services, takes a look at how to manage a key factor in the exporter or importer’s armoury.

Gloomy appears to be the word most frequently used to describe the UK economy at present and there appears to be no immediate prospect of a change in sentiment. In January, the headlines that dominated the financial press were all fairly negative. These included the fact that the UK limped out of recession as the economy grew by a mere 0.1% in the final quarter of last year. In addition, it was proclaimed that we have endured the deepest recession since the Second World War. Not particularly encouraging stuff.

It is clear that all sectors of the local economy are experiencing difficult conditions. The housing market remains under significant pressure, there is a growing question mark regarding the strength of consumer demand, mounting concerns over the health of the public finances, and the labour market remains tight. Yes, belt tightening appears to be the order of the day.

Perhaps surprisingly, given the economic weakness, Sterling has managed to claw back some lost ground versus the Euro. It moved back above the €1.15 level at the end of January. This was a five month high as demand for the UK currency increased on the back of growing market concerns about the risks to the Euro from the uncertainty over Greek fiscal policy. There is continuing speculation that the Euro will remain under short-term pressure due to the fiscal challenges facing not just Greece, but also Ireland and Portugal.

Sterling faces an important test over the next few months; the forthcoming General Election could produce a period of volatility as the markets worry about the far from certain outcome. Secondly, concern is growing over the new government’s plans to tackle the UK’s serious fiscal problem. This is a priority for either a Labour or Conservative government as the UK is under the spotlight by the rating agencies. A sovereign downgrade is not out of the question which would have a negative impact on Sterling.

The weakness of Sterling against the Euro in 2009 had positive implications for Northern Ireland, as it attracted significant levels of consumers from across the border. With significant question marks over levels of disposal income for local consumers, the ongoing influx of shoppers from the Republic will be extremely welcome by local retailers.
The perception that Sterling trades in fairly tight ranges against the major trading currencies is clearly outdated (many readers will remember when the Pound versus Punt exchange rate pivoted around the parity level with a degree of fondness). Perhaps not surprisingly, Sterling volatility causes inevitable problems for local finance managers. There is no doubt that finance directors and financial controller’s desire currency stability. Recent foreign exchange volatility has presented a challenge both for exporters and importers alike.

Companies who import products or services from the ‘eurozone’ should take a long, hard look at their pricing policy. Any business that is not managing its foreign exchange requirements closely could be in for a nasty surprise when it comes to paying for imports. Some companies try to avoid paying suppliers in the hope that the exchange rate improves. This can often cause real damage to the importer – supplier relationship.

Importers who continue to avoid currency losses on their operations are those that utilise current market rates when formulating prices and immediately hedge their anticipated currency requirements when a deal with a supplier is struck. This enables the business to accurately predict future cash-flows and protects from further Sterling depreciation. It also helps to delay price rises at a time when competition for products and services is intense.

On the other side of the coin, exporters must also recognise the importance of effective foreign exchange management. The attractive levels currently available for conversion of Euro receipts may or may not last. However, it would appear prudent for local exporters to evaluate the benefits of ‘locking into’ current market exchange rates for future sales.

Local exporters often identify the ‘worst’ exchange rate that safeguards the minimum desired levels of profitability. If the Pound rises to this level (known as a ‘stop-loss’), the company should hedge at least a portion (if not all) of its anticipated exposure. This will ensure that good opportunities to exchange currency receipts are not missed.

Given the increasing economic volatility, effective management of currency exposures is now more difficult than ever before. Ignore it at your peril.

You would think an economic downturn would take its toll on the local innovation economy. Not so, says Timothy Brundle, director of innovation at the University of Ulster who believes there were more tech startups in 2009 than at the start of the dot com bubble…

At the end of each year, my colleagues and I at the University of Ulster review the work we have completed for the private and public sectors. The analysis of the data for 2009 provides a valuable insight to the actions taken by entrepreneurs, businesses and social enterprises to counteract the effects of the economic downtown. It also provides an indicator of the local business prospects for 2010.

If the last year has taught us anything, it should be how to deal with uncertainty. As Groucho Marx once said, ‘the future isn’t what it used to be…’. But in the midst of recession, Northern Ireland’s innovation ecosystem is maturing and our tech companies are in pursuit of growth.

The University of Ulster has recorded another year of growth in our support for business in 2009. We undertook over 4,000 contracts, provided almost 1,000 innovative solutions to companies and provided over 50,000 days of management training. More businesses worked with us during the economic downturn than in any previous year of the University’s history.

The University has also enjoyed recognition for its business ventures. In the last three months of the year, our spin out company ‘Tactility Factory’ won the overall prize at the Northern Ireland £25K business start awards, our company ‘SOPHIA Search’ won the grand prize at the InterTradeIreland Seedcorn competition, picking up a cheque for €100,000, and the University’s work with iPhone was profiled on www.apple.com.

Behind the statistics is also an interesting story about the local innovation economy. We believe that there were more tech startups in Northern Ireland in 2009 than at the height of the dot com bubble. Whilst the overall startup climate is improving, it’s still hard for early stage companies to get exposure to the right investors and in the media.

We have also observed investments in technology aligned to the themes of ‘MATRIX’, the NI Science Industry Panel. For example, we have seen exciting developments in connected health, in geo-locating smartphone applications, consumer applications of nanotechnology and smart materials for large engineering projects.

Given the activity in the local innovation marketplace in the past year, 2010 should be another interesting year as the projects and startups begin to mature. It is possible that 2010 could see both Northern Ireland’s highest ever level of SME investment in R&D and the pursuit of an unsurpassed amount of seed and angel funding.

This year will also see an upgrade to our innovation infrastructure as Project Kelvin goes live, providing a secure, low latency, direct digital connection between North America and Northern Ireland. Kelvin presents a great prospect for local entrepreneurs and inward investors to provide competitive digital services around the world, creating opportunities for new businesses, encouraging new business models and requiring new skills within Northern Ireland.

China’s exports rose in December 2009 for the first time in 14 months. As the country touted to overtake Germany as the world’s largest exporter resumes its upward growth trajectory, Ulster Business editor David Elliott travelled to Hong Kong to hear how Northern Ireland businesses can best take advantage of such an opportunity.

When you work for a magazine called Ulster Business you’d think there’d be little chance of travelling far outside the locality in the name of journalism. However, the Northern Ireland economy hasn’t posted such impressive growth in the last few years solely as a result of internal consumption. Instead, we’re relying more and more on export trade.

The Department of Enterprise, Trade and Investment estimates 36.3% of sales made by Northern Ireland manufacturing companies in the 2008/2009 period were accounted for by exports worth £5.9 billion, an 8.2% jump on the previous year. This figure only includes manufacturing companies so if you add in our growing service base it’s not difficult to see we wouldn’t be as prosperous without international trade.

Armed with this knowledge, I headed off to Hong Kong in late November/early December as a guest of the Hong Kong Trade Development Council, or HKTDC, on what I like to call a fact finding mission but which my colleagues referred to as a “jolly”, whatever that is. I’ll get back to that misinformed opinion later.

Ostensibly, the HKTDC is a version of Invest NI, focused on “creating and facilitating opportunities in multinational trade for Hong Kong companies, especially small and medium-sized companies, and to create a positive image of Hong Kong”. The purpose of bringing a journalist from Northern Ireland, along with around twenty others from countries as far afield as New Zealand, Indonesia and Germany, was basically to sell Hong Kong as a business destination.

The region has been well known as a financial service hub for years when it flourished as a British colony and was able to take full advantage of the trade opportunities this offered to a small island off China’s south coast. The British government’s handover to the Chinese in 1997 could have seen a sea change in the governance of the area but the “one country, two systems” agreement means Hong Kong continues to enjoy significant autonomy to mainland China, particularly within its economy. If evidence were needed as to its popularity, look no further than the City of London where investment bankers, fed up with having their inflated bonuses taxed by the government, are reported to be leaving in droves for a low tax lifestyle in a less regulated Hong Kong economy.

This latter fact is ably demonstrated by Hong Kong’s spot as number one in the Wall Street Journal’s global Index of Economic Freedom, a position it has held for a number of years. It describes economic freedom as a situation where “individuals are free to work, produce, consume and invest in any way they please, with that freedom both protected by the state and unconstrained by the state.”

Spend any time in Hong Kong and you’ll concur with this statement and quickly understand why the inherent thirst for making money in the region flourishes in such an environment.

But don’t forget it is still a part of China, one of the fastest growing countries in the world, one which is becoming more and more important both as a global exporter and importer. So, Hong Kong finds itself with a highly developed powerhouse economy itself while also part of an economy with the potential to be a colossus.

The hard sell

Part of the sell to foreign journalists such as myself was therefore easy to guess: if you want to do business with China, come through Hong Kong. No language barrier, an understanding of the culture of business in China and experience dealing with UK companies means having a helping hand from a Hong Kong company could save time money and ultimately bring about profitable deals.

With this in mind and a rabble of journalists in tow, the HKTDC weren’t about to leave us to see the sights of Hong Kong after a late breakfast and a game of tennis. Instead they had a schedule packed with visits to indigenous companies, conferences and interviews, a schedule demanding enough to bring out the national stereotypes of the assembled hacks within minutes and its worth establishing getting this out of the way now. The Germans and Japanese arrived early to everything, took copious notes and showed immense enthusiasm throughout. Those from the UK turned up pretty much on time but displayed scepticism about some of the odder business ventures while accommodating themselves very well at the bar. The French turned up late or not at all, raised a questionable eyebrow to most things and argued amongst themselves. The Spanish turned up two days late and left two days early. Oh, and just to throw a spanner in the works, the New Zealand journalist knew nothing about rugby. But I digress.

Of the many companies and people we were introduced to, one of the highlights was Sir Gordon Wu who, through his company Hopewell Holdings, has been responsible for much of the infrastructure in Hong Kong and a large percentage in China.

“People told me I was crazy to be building roads when most people only had bicycles,” he said.
Despite touching 75, his vision for the future of Hong Kong hasn’t blurred and he continues to advocate stronger transport links for the region to the Pearl River Delta on the southern Chinese mainland, an area steeped in manufacturing companies. The poster project for this is the proposed bridge linking the west side of Hong Kong to Macau – a region which enjoys similar governance to Hong Kong following a handover to the Chinese government by Portugal in 1999 – and the mainland Chinese city of Zhuhai on the west side of the Pearl River Delta. The People’s Republic of China government have supported the project and, once completed, it will provide quick and easy access to the manufacturing region.

Another highlight was visiting Lan Kwai Fong, an area well known to visitors to Hong Kong as an entertainment district with many bars, restaurants and nightclubs. We met with Allan Zeman, a Canadian and chairman of Lan Kwai Fong Holdings, who moved to Hong Kong in 1975. Sensing the need for a western restaurant, he opened California Restaurant in 1983 in what was then an unfashionable and run down area. “Build it and they will come” seems to have been his philosophy for California quickly had queues out onto the street, a sight which prompted Zeman to buy up the neighbouring buildings and open more bars and restaurants.

Now one of the most influential people in Hong Kong and with 36 offices in other locations around the world, Zeman doesn’t overlook the debt he owes to the region’s openness in accepting outsiders and encouraging economic growth.

“Hong Kong is one of the best places in the world to do business,” Zeman said in the board room of his office. “It’s a ‘can do’ spirit and has only limited government interference.”

His love of the culture recently saw him surrender his Canadian passport – an act which apparently received a disbelieved reaction from the Canadian government – in favour of becoming a Chinese citizen.

Alongside these established businesses we were also introduced to some fledgling companies.
At the Hong Kong Science and Technology Park we met Dr Cory Kidd, another Canadian who has chosen to set up his business in Hong Kong. Cory’s product is a Autom, an interactive robot which helps people lose weight (cue raised eyebrows all round). The product may seem outlandish but as he says, a small portion of the huge US dieting market could reap rewards. Besides, the reason for us meeting Cory was to demonstrate how a manufacturing company, particularly one involved in a high tech product, can base its headquarters in Hong Kong and be close to a low cost manufacturing base in China.

“Being able to nip across and spend more time with the manufacturer helps develop the product much quicker and with less margin for error,” he said.

Hong Kong wine?

Upping the outlandish quota by some margin was the 8th Estate Winery, a first even for Hong Kong. Bearing in mind Hong Kong has very little cultivatable land, a winery wasn’t the first thing I thought we’d be going to see. This wasn’t diminished after arriving through the service entrance of a large industrial block but all became clear when we entered a unit decked out in oak wine barrels.

The 8th Estate makes wine from – and you can imagine the French journalists’ faces when they heard this – imported frozen grapes. The tasting session didn’t garner many fans from the group but again the story here isn’t about the product but about the welcome the concept has received. The 8th Estate has found a market supplying a niche product – wine produced in Hong Kong – and there are few places in the world where such a – let’s be frank here – bonkers idea would get the backing or indeed muster the enthusiasm to get to this stage.

This attitude sums up Hong Kong, a place where everyone – from the international business person to the stallholder on the street selling live fish – has an eye on business, where outsiders are welcomed and where innovative ideas are embraced.

It’s by no means perfect – property prices are incredibly high, a cloud of pollution seems to constantly hang over the city and access to countryside involves a half hour boat trip – but its expat inhabitants say these are bearable foibles. And for those companies in Northern Ireland looking to establish either supply links or sell into China, the path could be smoothed considerably by having a base or using a broker in Hong Kong.

Mission accomplished?

A lucky coincidence of my visit to Hong Kong was the fact it overlapped with an Invest NI trade mission. In true HKTDC getting-things-done style, no sooner had I stepped off the plane and dropped my bags in the hotel room than I was on one of the historic Star ferrys heading across Victoria Harbour on the 20 minute hop to the InterContinental Hotel in neighbouring Kowloon.

The transition from Belfast in November to a bobbing wooden ferry looking back at the skyscrapers of Hong Kong came full circle when I walked into the InvestNI reception at the Kowloon hotel where representatives from 25 Northern Ireland businesses were gathered to round off a 10-day mission to Hong Kong and China.

Of these 25, mission manager Linda Forte – described as the Mother Hen of a previous trade mission attended by a predecessor in this job – made sure I got to meet most of them. This may have been because Invest NI has come under increased scrutiny since the release of the Independent Review of Economic Policy, or IREP, but you got the feeling Linda was happy to show off the progress this group had made.

While criticism levied at Invest NI has been wide and varied, its export missions have generally fared well and, speaking to local business people in the course of this job, there’s a feeling they produce excellent results for those companies involved.

Certainly those I met in Kowloon were fans and found the investigative work and preparation the InvestNI team had put into the trip had saved time, effort and money.

One in particular had visited China previously on an independent visit and only managed to organise meetings with five potential customers/suppliers. On this visit he had already met with nearly three times that number as a result of the efforts of the InvestNI team in sourcing contacts, organising meetings and laying on transport.

It’s all too easy to knock InvestNI, particularly when hard and fast figures to quantify the results of such missions are nigh on impossible to come by, but in this instance – from guitar manufacturers to waste handlers – I encountered nothing but praise for the organisation.

We’re cheating slightly here by having two Ones to Watch but giving up your job to follow your passion isn’t something to be taken lightly. David Elliott went to Banbridge to meet Greg Radcliffe and Mark Anderson who run coffee roaster Ristretto.

Ten years ago your chances of getting a good cup of coffee in Northern Ireland were limited. If you were lucky enough to find a café not serving instant coffee, you might be treated to filter coffee of nondescript origin which had been stewing on the stove for most of the day and tasted remarkably like burnt toast and floor sweepings.

Not so any more. The plethora of artisan coffee shops which have sprung up around our shores over the last few years – both home grown and those with a global reach – has been truly phenomenal as our thirst for a good cup of ‘Joe’, as they refer to it in the US, grows. The choices in these establishments are endless; from the most basic element of an espresso – a concentrated shot of coffee produced by forcing hot water at high pressure through ground coffee – to the cappuccino, latte, mocha…the list goes on.

This growth in availability has brought coffee to a much wider audience but while overall the quality of coffee we are drinking has improved, it is still difficult to get a premium cup of coffee on the high street. This has meant some coffee lovers have been willing to go to extremes for the perfect brew. This reporter is a member of this specialist group – known by disinterested friends and family as coffee bores – and has been known to go to great lengths to source espresso beans from a favourite Covent Garden roaster. This hasn’t been easy and has involved great expense and inconvenience on my part (not to mention derision from a friend whose whole family won’t hear a bad word said against the Nespresso machine) so imagine my delight when I found out a company in Banbridge were roasting coffee which – dare I say it – was better?

Gregg Radcliffe and Mark Anderson set up Ristretto four years ago to supply freshly roasted speciality coffee to restaurants and cafes where coffee is, in their own words, taken very seriously. The seriousness with which Gregg and Mark take their coffee was demonstrated by the fact both of them gave up jobs in the IT industry – for AMT Sybex and Sysco Software respectively – to follow their dream of improving the standard of coffee in Northern Ireland.

“Being in very well paid, secure jobs with pensions and health care, our motivation for forming Risretto was definitely not money orientated,” Greg said. “Instead, we felt we could make a change for the better in the coffee industry by providing higher quality, freshly roasted coffee and back up unrivalled in the industry.”

A visit by Ulster Business was obviously essential to gauge if Risretto really was the crema of the crop (you bores will get that one); that and the fact a 30-mile drive is obviously nothing when you’ve been sourcing coffee from a different country for the last couple of years.

Despite arriving late after a number of overrun meetings and the requisite number of wrong turns, I was cheerily greeted by Greg at what looked like a nondescript industrial unit from the outside but which turned out to be a master roasting and tasting room on the inside.

With initial formalities over, and probably sensing my intentionally caffeine-free stare, we got on to the tasting. We cupped – steady now, it’s a formal term for tasting in the coffee world – brews from Nigeria and Malawi, two very different coffees whose individual attributes stand out when compared side by side. Not that coffees need to come from different countries to taste markedly different; variety, soil type, weather, aspect and many other differentials all go into the mixing bowl to create a coffee’s signature taste, but I digress.

We then moved onto tasting Ristretto’s espresso blend – by this stage the caffeine-free stare had long since passed, soon to be replaced by a caffeine-frenzied stare – and boy did it deliver. After tasting a couple of these it came as little surprise to learn the company was one of only six roasters in the UK and Ireland to receive two gold stars for their espresso blend at the 2009 Great Taste Awards organised by the Guild of Fine Food. Ristretto also picked up one gold star for its Costa Rica Reserva San Boco filter coffee at the awards.

While awards are all very well, there’s nothing like having a big name fan base and it says a lot about Ristretto that Michael Deane chose the company to supply coffee and related machinery (Ristretto also supply Rancilio espresso machines and grinders to his restaurants). Here’s what he had to say: “It was exciting to find like-minded people who are just as passionate about coffee as we are about food.”

The passion Ristretto hold for coffee is even more evident when Greg shows me the roasting room where the real magic happens. Sacks of green coffee are stacked along the wall from all corners of the coffee-growing world while used sacks adorn the walls in a shrine to some of the best beans to pass through the doors. Roasting basically involves putting the green beans in a machine not dissimilar to a washing machine consisting of a slowly revolving side-mounted drum with a gas flame underneath. However, this machine comes from Italy, a country not known for overlooking aesthetics and you can be assured it doesn’t look like a washing machine.

After an amount of time and heat these expert roasters seem to judge with an extra sense which only comes with experience, patience and a connoisseur’s touch, beans destined for filter coffee are released to be cooled – Espresso beans undergo a secondary roasting process – before being either bagged as whole beans or ground and bagged.

As this article hits the shelves, Mark and Greg will probably be in Guatemala on a sourcing mission to ensure Ristretto maintains the reputation for quality it has already picked up. Going all that way to source your coffee beans shows real commitment and, having discovered this premium roaster was literally round the corner and has a website where coffee can be ordered for delivery, there’s no need for Northern Ireland’s coffee drinkers to go to the ends of the earth to get a good cup of coffee.

Image courtesy of the Northern Ireland Tourist Board.

There can be no mistaking the hoards of shoppers heading north across the border to take advantage of the beneficial exchange rate. Julie Sloan, director of Mintel Ireland offers a statistical insight into how much Northern Ireland will benefit from this seasonal bonanza.

In December 2008, a report in The New York Times noted that Newry had become the “hottest” shopping location within all of the European Union’s open borders, with cross-border shoppers visiting the city to receive discounts of up to 30%.

2009 looks likely to follow suit with November 23rd’s public sector strike action in the south of Ireland giving sudden impetus to the start of the Irish Christmas cross-border shopping season. Rather than standing on picket lines, it seems strikers decided to use the chance to visit Northern Ireland to conduct some Christmas shopping. The influx of Republic of Ireland cross-border shoppers saw a five-mile tailback outside of Newry, one of the key destinations for cross-border shoppers.

Enjoy the extra footfall while it lasts

So who’s benefited most? During the 2008 Christmas period, between €350-550 million was spent in Northern Ireland by southern shoppers in 2008, a loss upwards of €640 million to the Republic of Ireland economy. Even the lowest estimates show that the Northern Ireland economy has enjoyed a serious boon during the recession, helping Ulster retailers to survive the downturn. While some argue that UK retailers have benefited more than independents, there is little doubt it is better to be sitting this side of the border.

The UK government has also benefited from the increase in VAT and duty revenue, with low estimates indicating that the cross-border shopping trend boosted VAT and duty takings by €58 million (£49.7 million) in 2008.

With higher unemployment (12% and rising), pay cuts throughout the workforce and the average Republic of Ireland household having an average of €128,000 debt, shoppers will be making cutbacks this Christmas. The annual consumer survey by Deloitte (Sept/Oct 2009) estimates that the average southern consumer intends to spend some 22% less than 2007 levels during the festive period (circa €1,110).

Reasons for travelling north are clear; in July 2009, a study by the European Commission found that on average, consumers in the south of Ireland paid 27% more on average for food than other European countries, with prices on average 20% higher than UK supermarkets.

Shopping behaviour and motivations

In August 2009, Mintel Ireland conducted a survey of cross-border shoppers in the Republic of Ireland border regions (500 main shoppers). Mintel’s report, Impact of Cross-Border Shopping – Ireland – August 2009 found that most cross-border consumers are willing to travel up to an hour to shop in Northern Ireland, if it means they can save money on their grocery shopping.

Grocery retailers are taking advantage of the cross-border shopping trend, with 60% of those surveyed visiting Asda, and 46% visiting Sainsbury’s. General groceries, alcohol, fresh produce, cereals and other food items are among the most common purchases. Clothing is a draw to shoppers among half of cross-border shoppers, with discount clothing more sought-after than expensive designer brands.

Alcohol is set to be a favourite Christmas gift in 2009, with some 39% of cross-border shoppers buying alcohol. Anecdotal reports claim that some visitors to Newry have filled trailers with alcoholic drinks to take home.

Not just for Christmas

Mintel’s research found that some 20% of cross-border shoppers felt that Northern Ireland offers a better variety of shops and activities.
Some 39% of those surveyed claim that they will continue to visit Northern Ireland even if the exchange rate becomes less favourable, while a further 21% stating that they ‘probably will’ still visit Northern Ireland.

Some 39% of cross-border shoppers visit Northern Ireland only to shop and return straight home after they have finished shopping. This is compared to 17% of cross-border shoppers who claim that they spend the day in Northern Ireland or ‘make a day of it’ undertaking other leisure activities. Over a third of cross-border shoppers eat lunch when cross-border shopping, while just under a fifth stay and eat an evening meal.

Cross-border traffic shows no ‘immediate’ signs of slowing

Price is the overriding motivator, with almost three-quarters of consumers shopping ‘up north’ to save money. The UK 15% VAT rate (21% in Republic of Ireland), coupled with an exchange rate of £1 to €1.10 (November 2009), means that northern retailers can expect to benefit from the cross-border shopping trend throughout the Christmas shopping period, and into the New Year.

However, both VAT and the exchange rate are subject to change, with widespread predictions suggesting that the UK may increase VAT to a level comparable to the Republic of Ireland which could put a halt to cross-border shoppers. Furthermore, there have been defensive moves; southern retailers have been lowering their in-store prices to become more competitive, and the Irish Finance Minister has made emotive calls to consumers to shop in a more patriotic ‘Republic of Ireland-tax-friendly’ fashion.

As a result these factors should see a slowdown in cross-border shopping in 2010, however the cross-border experience is likely to have a long-term impact on Northern Ireland tourism, and to have instilled a price-comparison culture in border counties.

Economist John Simpson takes a look at the provision of water and sewerage services in Northern Ireland and asks if the Utility Regulator is setting difficult targets for Northern Ireland Water.

Businesses already pay a commercial price for the use of water and sewerage services. Soon domestic households must expect to face the introduction of charges.

If the Utility Regulator, Iain Osborne, has his way and if Northern Ireland Water (NIW) can function within the budget that the Regulator would like to set, then the cost of domestic water and sewerage charges when they come will be lower than they would be today. The Regulator has made a first bid for an 11% reduction in the projected revenue needs of NIW below what was an already decreasing bid.

“There is a ‘considerable scope for additional efficiency given that the current efficiency gap requires close to a 50% reduction in operating expenditure ..‚’ Draft Determination p.40

Over the next three years, within a newly set price control framework, the Regulator proposes that NIW’s annual operating costs should fall from £228m in 2009-10 to £166m in 2012-13 – a 30% reduction in three years! Intuitively, the Regulator risks undermining public confidence in NIW by raising expectations too high!

If the Regulator sets realistic but ambitious targets, that is a sensible challenge: the Regulator pushes the service provider. If the Regulator is too ambitious, the service provider can be on ‘a hiding to nothing’‚ and the Regulator becomes a critic, possibly an unfair critic. In a first ever price control arrangement, a charge of excessive targets should be avoided.

Operating costs
NIW in its own proposals suggested that operating costs might be reduced by 13%. The Regulator added a further 11% reduction and made the challenge even greater by restating the baseline figure for 2009-10, in what looks like an unrealistic movement of the goal posts by taking a further 5% out of the calculation..

The Regulator has published his draft determination of the costs of the operating and capital programmes that he would wish to approve for the years from March 2010 to April 2013. Naturally, as a Regulator, his ambition is to push for a more efficient set of services whilst improving standards and coping with changing demand.

NIW, just as naturally, whilst having the same ambitions, does not wish to be asked to do the impossible. NIW has been finding its feet in a tense political arena and has been pilloried for the failings of the inherited civil service organisation which was very inadequately prepared for a fully commercial environment.

The inheritance
One of the important lessons learnt in the last five years is that Northern Ireland was living with water and sewerage services that were increasingly inefficient, undercapitalised and enjoying a public perception of good quality services that was sometimes unjustified. The debate about water charges was, and is, important as a political question but it had the effect of disguising the serious questions about improving efficiency.

The creation of NIW as an accounting entity, whether a GoCo or quango, was a necessary step but had the effect of focusing on the political choice of the institutional arrangements and taking it away from the difficult commercial questions. NIW has had a baptism of fire where politics, organisational efficiency, performance criteria and regulatory imposts in the EU-based legislation have fallen on an emerging new organisation.

Now, just as NIW has shown its capacity to survive and build a credible Business Plan, the Regulator arrives and sets the challenges so much higher. Of course, the Regulator believes that he does have good reason for the tough challenges.
To set the standards for performance in the next three years, the Regulator has not just completed an internal efficiency audit from inside NIW. The standards have been developed mainly from a comparative analysis with performance in other water authorities coupled with adaptations allowing for the impact in a small region with a dispersed population.

Comparisons
Perhaps the most critical evidence used by the Regulator to underpin his budget estimates comes from comparisons with other UK water companies. Two features are central to his conclusions. First, NIW is:

“.. at the bottom of the league table for UK water companies..”

and second that in an overall performance assessment in 2007-8, whilst NIW generated a score of 98 which attracted the attention of the Regulator:

‘Our challenge to the company … is to outperform the predicted score of 201 by 2013.’.

This comparison with other water companies is so central to the ambition of the Regulator that it is surprising that in the document for public release, none of the comparative figures is quoted. The Regulator has used econometric analysis to build the argument. Professionally interested stakeholders are asked to access other documents on the Regulator’s website to test the validity of the most critical statement in the published proposals.

NIW will presumably challenge the Regulator’s proposals. That is in the nature of the Regulation process. The challenge can be expected to centre on excessive expectations on the ability to reduce operating expenses and also on the level of capital spending.

Capital spending
Capital spending, and the methods by which it is financed, has increased substantially since NIW was established. The Regulator is questioning the scale and efficiency of the capital spending plans. If the Regulator’s opinion prevails, the capital expenditure proposed by NIW of £622m in three years would be cut, with other adjustments, to £520m.

The Regulator argues that £80m (13%) can be taken out, based on (what is described as) a scope and challenge review and a further £59m taken out following a benchmarking and econometric modelling analysis. Some additional items are included to allow for the speeding up of the delivery of some essential wastewater treatment works.

Controversially, the Regulator and NIW are at odds as to whether capital investment can be expected to be completed at prices lower than elsewhere in the UK. NIW suggested that like-for-like projects might cost 7% less than an English average. The Regulator is working on a 17% lower cost base.

Since many recent contract prices are available, this difference is too important to ignore and is susceptible to quantification. When the final price control is agreed, this uncertainty should be removed.

Water charges for households
The Regulator has made an extra contribution to the public debate about water services by setting out the statistics on the probable level of an average household charge for water services, if separate charging is introduced. Of course the document is politically neutral in that the statistics are presented for information and not as a recommendation.

Under the regime proposed, the average annual household charge at 2009 prices would be £369 but, with the transfer of the amount notionally included in today’s regional rates, this would be an extra household payment of £209.

Of course the Regulator can argue that, thanks to a tough price control, these costs are significantly lower, over £40 pa, than might otherwise have been the case.

That gives the Regulator the last word. He has been tough, even too tough, in the expectations from NIW but, ultimately, his motives are consumer orientated!