From: Sent: 14 February 2013 18:48 To: Subject: Re: RE: INEOS Attachments: Meeting INEOS Profilepdf; Jim Ratcliffe Profilepdf; Indicative Agendapdf; Ineos Views on UK Hi Please find attached the briefing materials as promised. These include: 0 An overview of the general purpose of the meeting and the issues Jim is likely to touch upon 0 A profile of INEOS as a company a A biography ofJim with a photo 0 An indicative agenda 0 A PDF version of a presentation that Jim would like to use as a leave-behind. Jim doesn't intend to give the presentation, but he may wish to refer to a few slides during the conversation. We'll clarify this with him and let you know as soon as possible if he needs any AV. I h0pe this will be ok. I should also add that the 'agenda' and meeting briefing are only indicative: Jim is very much his own man, and intends to take a flexible conversational approach on the day. Thanks for all your help and let me know if you need anything else. Kind regards, Portcullis Public Affairs St James House 13 Kensington Square London W8 SHD T: F: El; From: Date: Thursday, 14 February 2013 12:33 To: i Subject: RE: INEOS Hi Thanks for the speedy response. We haven?t decided who else will be in the meeting at this stage it will depend on the policies that you want to discuss. HM Treasury From: . . .. Sent: 14 February 2013 12:27 To: Subject: Re: Hello That is not a problem. I will send everything you need across this afternoon. Can I ask who will be joining the Chancellor for the meeting? Regards, Portcullis Public Affairs StJames House 13 Kensington Square London W8 SHD T: F: E: From: Date: Thursday, 14 February 2013 12:23 To; Subject: RE: Apologies for bothering you again in addition to providing detail on the presentation and proposals today, the Chancellor?s office have asked for background on and a bio (inc. photo) for Mr Ratcliffe. If you could provide these too, that would be great. Thanks, HM Treasury From: Sent: 13 February 2013 17:39 To: Subject: RE: INEOS Hi Thanks for responding so quickly. Just to let you know that i need to get briefing to the Chancellor early on Friday so I would really appreciate any information you could give me as soon as possible, ideally tomorrow, as then need to seek out the relevant leads across HIVIT to give me briefing. 2 Many thanks, HM Treasury an From: Sent: 13 February 2013 11:24 To; Subject: Re: INEOS Hello We are currently finalising with Jim what issues he would like to focus on, and I will send over relevant information as soon as it's ready. 1 can assure you that you will have a copy of the presentation in advance and what Jim intends to talk about. Kind regards, Portcullis Public Affairs StJames House 13 Kensington Square London W8 5HD T: F: E: From: Date: Wednesday, 13 February 2013 11:10 To: Subject: INEOS Hi The meeting with Mr Ratcliffe is in for Monday. Idon?t suppose you could share any information about specific points that he wishes to raise, or an early copy of the presentation, with please? handover to to take forward, she?s more of an expert on this than Many thanks, *?ki This email and any ?les tranSmitted with it are intended solely for the use of the individual(s) to whom they are addressed. If you are not the intended recipient and have received this email in error, please notify the sender and delete the email. This footnote also confirms that our email communications may be monitored to ensure the secure and effective operation of our systems and for other lawful purposes, and that this email has been swept for malware and viruses. The original of this email was scanned for viruses by the Government Secure Intranet virus scanning service supplied by Cable&Wireless Worldwide in partnership with MessageLabs. (CCTM Certificate Number 2009/09/0052.) On leaving the this email was certified virus free. 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In case of problems, please call your organisation?s IT Helpdesk. Communications via the may be automatically logged, monitored and/or recorded for legal purposes. Why are we here? - INEOS is a very large global manufacturer - INEOS has a significant UK presence UK MANUFACTURING A Presentation to H-M- Govemment - The UK frankly has not been a very attractive place to manufacture . - We would like to explain JIM RATCLIFFE 24 May 2012 IN INEQS Contents - INEOS Credentials - UK Economics and Manufacturing views on UK Manufacturing Logistics - Energy Pensions Government Attitude Unions Asset Infrastructure Quality Skills Tax - Conclusions INEQS 3 INEQS Among FTSE 100 Manufacturing companies INEOS would he British Arrerican Tobacco Imperial Tobacco Group Associated British Foo ds Royal Dutch Shell '29:.2 BP I233.4 Unilever INEOS Glaxo SmithKline AstraZe neca BAE Syste ms 36 Group Rolls-Royce Group Johnson Matthey Diageo SABMiller Reckitt Benckiaer GKN Rex-am Tale 8. Lyle Smith 8. Nephew Shire 2-5 IMI 2.1 Meggi?tt Croda International Source: Bloomberg 2011 AnnLal sales in Ebn in the UK SEAL SANDS 35!} turnover 600 in replacement capital 205 employees GRANGEMOUTH 4 bntumover bn replacement capilal 1,350 employees NEWTON AYCLEFFE 2151:] turnover ?250mreplacementcapilal 319 employees RUNCORN 8v NORTHWICH 2 bn turnover 3 bn replacement capital employees SA LTE 300 turnover 400 replacement capital 42 employees INEOS in the UK Largest Chemical company - Turnover ?7bn 58ites - Replacement cost of assets ?11bn Employees 3,500 - Employees plus indirects 21,000 a Grangemouth in Eos a Runcorn Seal Sands I INEOS Manufacturing Credentials INEOS Manufacturing Credentials GERMANY: Large5t European Chemical USA: Largest Chemicals manufacturer worldwide INEOS 5th largest chemicals manufacturer (BASF No.1) INEOS 2nd largest cracker Site 40th manufacturer NEos turnover $8,5bn INEOS turnover ?7bn has 14 sites INEOS has 9 sites 50% Of INEOS profits BELGIUM: Largest Chemicals complex in Europe in Antwerp INEOS 2nd largest chemicals manufacturer (BASF No.1) INEOS 15?? manufacturer INEOS turnover ?4bn INEOS has 6 sites INEQS 11 mos 2011 EBITDA Breakdown by Geography Cologne Other France 2% 4% UK Belgium 13% No?h America 46% Germany 30% "13 Cologne I Cologne Antwerp First INEOS Plant 1998 Antwerp The INEOS site is the size of the City of London Chocolate Bayou Second largest cracker site in USA Mobile USA Newest Phenol plant in the World IN 19 IN 20 Green Lake USA World?s largest Acrylonitrile Plant Green Lake USA f? Lhujg?g?? WINEQS mg . 22 Joffre Canada one of the world?s largest LAO Plants UK Economics and Manufacturing ?ls Manufacturing Important to the . .7 .. INEQS . 24 Components of GDP Official UN Definitions - Services - Industry activity Manufacturing" Other (oil gas, mining, utilities, construction) oAgriculture Fishing Manufacturing component of GDP 35 30 -I 9525 20;- OnsetonOOBrecessmn 10 90 - 80 GDP Components 2008 100 60 50 .. .. 40 30 20? United Kingdom Manufacturing component of GDP: Rest of Asia 2000 2005 2010 1990 1995 Agriculture Services Industry, other I Manufacturing 26 ?-?Thailand - -- Korea, Rep. -?Ma aysia ?Vietnam India 28 Manufacturing component of GDP (2008) Manufacturing component of GDP recent trends 411 1,200 - 35 an.? . - -. 1,000 - China 30 q? . .. . 800' 9:25 GBP bn 600 - errnany 400 20 - - -- -- witzarland 200 15 - 0 USA China Japan Germany UK 1 1980 1995 20m 1005 2003 Manufacturing Jobs Lost last 15 years Manufacturing Jobs Lost last 40 years Canada italv Japan USA Germany France UK Canada Germany Italv France Japan 3, 32 UK Manufacturing General Market Conditions - Europe Depressed - UK verging on recession - Asia very competitive, aggressive and growing l'e VERY lNEcs 33 Conclusion Had we focussed on manufacturing like Germany over the last 15 years UK would have 2 million more manufacturing jobs Chancellor would not be borrowing ?2.5 billion per week or more! And typically manufacturing jobs pay 30% more than services jobs in UK and Germany lN EQS 35 Manufacturing jobs in Germany UK 1995 Germany: Population 82 million Manufacturing component GDP 22.6% Manufacturing employees 9 million UK: Population 58 million Manufacturing component GDP 21.2% Manufacturing employees 5 million 2008 82 million 22.7% 8.5 million 61mil ion 11.6% 3.3 million Views on UK Manufacturing ?Is it a good place to manufacture?? 35 Which Countries have Manufacturing USA Germany Switzerland iNEos IN Cheap energy (shale gas) Massive market Supportive government Very flexible labour market Labour cost, pensions, tax OK Excellent skills Large market Very strong manufacturing base Worker attitude excelient Pensions, unions, energy, labour costs OK Excellent skills Close to many markets Innovative nation Infrastructure excellent Very low corporate tax 3? LOGISTICS 39 Which Countries have Manufacturing China - Massive market and high growth - Cheap labour cost - Supportive government - No union nor pension issues UK - Very innovative - English language But disadvantaged on: Logistics Energy Pensions Government Attitude Unions Assets infrastructure Quality Tax iNEos as Logistics "The UK is fundamentaiiy disadvantaged as an island" - For many manufacturers in the UK to maintain critical mass the ?home? market is simply not big enough and therefore a proportion of production must be exported - It is expensive to freight across the channel where the main markets exist - Just a fact, nothing can be done about this Thus, there have to be some compensating advantages to manufacturing in the UK. ENERGY INEQS 41 Wholesale electricity prices European wholesale Power Prices ?l'M Wh UK 90 - Germany France {Exeltium} 80- 70- 60- 50? 40- 30- 20- 10* 2002 2004 2006 2008 2010 2012 2014 2016 INEQS 43 Electricity Electricity costs are high and uncompetitive for large users in UK, because: - Wholesale power prices in the UK are high - Other European countries give substantial relief against energy taxes - No energy taxes at all in USA (Gulf Coast) 42 Environmental taxes on energy for large users No Taxes US Gulf I Large User (100W) Sweden :--;Large Userlmm) Nomay rmany France UK Belgium Total delivered electricity prices 2015 (very large users) US Gulf Nordic 2-1 Taxes Wholesale Delivery France Germany UK Gas For industrial users: - Gas prices are similar across UK and northern Europe - USA prices are much lower since 2010 (shale gas effect) - Both USA and China governments support shale gas vigorously Shale gas is also a European opportunity 45 4? Environment If the western world (Europe and the USA) do not manage a balance point on environmental regulation that both protects the environment and quality of life and protects our industry. then the industry will just end up in Asia (where the standards are lower and the pollution will just ?oat over the Pole towards us anyway with no ability to controi it by the Western world). Quote: Kate Holzhauser macs 46 Natural Gas US massively below Europe P?th UK National Balancing Point US Henry Hub gas prices 70- 60- 50- 4o- 30- 20- 10-' 0 INEQS UK NBP US Henry Hub 2005 2010 2012 2014 2016 43 Exeltium Case Study in France - Around 30 large electricity users have provided ?2bn to EDF to build a 1,000 MW nuclear plant - Financed by 10% equity and 90% debt - Provides stable (20 years fixed) and competitive electricity prices - At wholesale, cheaper than UK and Germany? iNEos Energy Suggestions for UK 49 Backdrop: Generally energy in the UK is more expensive than other developed countries - Reduce electricity taxes for industrial users; too high vs Germany, France, Scandinavia and USA - Pursue opportunities in shale gas and nuclear (eg Exeltium approach) to provide competitive sources of energy - Overaii UK must provide a tong term competitive energy piatform for manufacturers INEQS 51 Total delivered electricity prices 2015 (very large users) U5 3 Wholesale 3 Delivery Nordic zTaxes France Germany UK IN PENSIONS INEQS 52 DB Pensions are a National Disaster What makes DB Unaffordable? UK Private Sector deficits total ?222 bn" Mortality imPTOVemen?is Billions being diverted to pension schemes rather than invested in jobs Low yields and growth . - Early retirement One of the blggest threats to UK private Industry - PPF levy - No sign of any Government policy to address this threat - Trustee ?prudence? Government policy changes have exacerbated the situation rather than improve it Legislation/the Regulator only serve a duty of care to the employee, none to the employer Source PPF Dec 2011 mass 5, lNEos What makes DB Unaffordable? Example DB Pensions are getting very Runcorn Deficit Legislation overload ?m . De?cit Company Age legislation Contributlon Tax simplificationlChanges 06. 2012, 2013? 2004 25 9 Section 75 Debt 2007 56 17 RPUCPI 2010 200 33 Auto enrolment 2011 340 GMP Equalisation -even the lawyers don't understand it! New pensions bill to come Causes of Deficit ?m - Consequences InveS?trnem Returns 50 Pensions no longer understood by Companies, Unions or employees Monal'ty 50 Trustee role becoming full time and professional 100 . . . ms Be ml ence All Sldes have to use adVIsers (actuarles, lawyers) at every step, Lower Gilt Yields . 140 adding to overall cost Politicians don?t understand pensions either, so no political discourse Pension costs at Runcorn and Grangemouth 60-80% of salary on the pensrons lssue IN IN EQS DB Pensions - Suggestions Include a Duty of Care to the Employer's business in the Regulator's remit Remove the right to strike (directly or indirectiy) on new starter pensions and DB closure (ie for valid pension change) As in Holland, Trustees should have to consider all options to close deficits, notjust increased Employer contributions Pensions increases to be conditional on adequate funding Apply the same 'red tape' rules on pensions as in other areas of legislation . Government Support The UK compares unfavourany with countries such as Germany, USA, China, Beigium am it remains the case that the level of support for, or even interest in, manufacturing within large parts of the Civil Service is still conspicuous by its absence (Chris Tane, CEO ChlorVinyis) General sense of Government not batting for UK Industry (or only reluctantly) eg. antidumping, CERs (Ashiey Reed, CEO Enterprises) When we approached the German Government about EU-ETS the response was "how can we help?. In the UK the answer was scepticism (Chris Tane, CEO ChiorVinyis) The complete lack of manufacturing knowledge of ministers (and officials) is the root, the majority have no comprehension of what goes on in the manufacturing world (Gordon Grant, GM Grangemouth) iNeos 5, Government Attitude to Manufacturing - 53 USA Case Study Bio has been reviewed favourably by the USA government They have supported the first commercial scale plant in Florida Capital cost of the plant is $150m USA government agencies have provided: Grants 5 52.5m Loan Guarantee 75m TOTAL Support $127.5m IN Comparison of USA UK support Bio Plant, Vero Beach, Fiorida INEOS Timelines for Bio and Chlor investment Construction I Application submitted I Ganlaw arded Loan I I - I Funds received Bio Grant I I (hnsiruclion Chlor Grant Years 1N 62 Bio Plant, Vero Beach, Florida Mos? Membrane Chlorine Plant, Runcorn New Cell Room marked iNEos 65 Manufacturing in China The "5 Year Plan? drives manufacturing goats . Petrochemical parks available with land and utilities - Construction costs low, but good quality equipment - Fixed costs low; feedstock costs similar to deveioped countries Higher technology businesses encouraged. eg tax breaks - Training and education oriented to technology based industries IN EQS a? German Case Study - During 2004-6 we investigated a new petrochemicals complex in Wilhelmshaven, Lower Saxony, Germany - Based on converting gas streams from the North Sea into ethylene and other organic chemicals - Capital cost of complex: ?970m - German authorities offered support: Grants: City of Wilhelmshaven 80 State of Lower Saxony 60 Loan guarantees: City of Wilhelmshaven 30 Lower Saxony Federal Government 560 support INEOS- as General Observation ?From a very good position 20+ years ago, the actions of various bodies (ultimately driven by Government indifference to manufacturing) are gradually making it more difficult to manufacture competitively in the "it takes a long time to turn a super tanker around and various Government agencies seem to be working in the wrong direction? IN EQS a UNIONS at Unions - Suggestions - Unions can strike for any reason anytime - Count days of material disruption as days of strike hence loss of pay - Ballots and trade disputes Require a ballot to specify precisely the point at issue, not vaguer refer to "the trade dispute" (as commonly happens) - Days of industrial action . Require a new ballot for each separate period of industrial action, so unions cannot ballot for industrial action and then notify employer of say one day's strike a month for 6 months - Secondary action Make it illegal to allow picketing at shared sites. Eg tanker drivers should be allowed to picket at their tanker company head office, not at INEOS sites iNEos Unions INEQS ASSET AND INFRASTRUCTU RE QUALITY - INEQS Asset and Infrastructure Quality ?Sadly assets and infrastructure in the UK tend to suffer from neglect and under?investment? INEQS "41'2" - - BEFORE INECJS BEFORE mess INEQS F5 Skills Germany has a highly skilled workforce I Germany: Children streamed at age 11 into equivalent of Grammar School and Secondary Modern - Grammar School finishes at 18 years and students either go to University or Polytechnics Secondary Modern pupils finish at 16 years and then 90% do an apprenticeship - Apprenticeships last 3.5 years with a mixture of "onjhe job" and classes at Technical Colleges. Then conclude With a diploma Ie qualified plumber, eiectrician, etc. - All companies in Germany must provide apprenticeships or if not payfor them - All plumbers, electricians, etc may then study on the job and evening classes for a further 3-5 years typically to earn a ?Meister? certificate IN (CCt-Charnbarol Commerce and Industry) Skills We need useful skills in the UK not silly degrees Germany (Cont?d): Example virtually ail private plumbing companies are started by ?Meister? . . Here are a few 3 year full time (Hons) degrees you can study in the UK Plumbers I at what used to be very sensible institutions (ie Polytechnics) You would not use a plumber In Germany without first knowing his I quali?cation - Equestrian - The biggest difference between the UK and Germany is the level of - Cartoon Comic Arts RESPECT for these qualifications (quotes our most senior German) Surf Science Technology - Sports Studies (incl. David Beckham module) Belgium and Switzerland: - Advice Studies - Both have good skills - Both have a similar approach to Germany IN eos Eos an Case Study Cellroom rebuild Runcorn 2005 Capital cost ?300m 300 contractors on site for 24 months Productivity 50% of US Gulf Coast Unions bannedlcompletion bonuses so we could not finish the job Eventually instructed all contract labour off the site and completed the job internally 8: Some ?People? Quotes from INEOS Manufacturing Execs Level of competences in the UK is low (Ghislain Decadt) The US and Germany employ higher qualified people than the UK {Tony Traynor) The ownership regarding the assets is much higher in Germany than the UK across the whole organisation (Hans Niederberger) In Townhall meetings in Germany the main discussion centres on investments in the asset and maintenance budgets, and how to get skilled people into the organisation. In the UK the topics are bonus, share scheme and pensions (Hans Niederberger) Especially at Grangemouth the influence of the Unions into the daily work is far too big. Sometimes it looks like the Unions are leaders of the site {Hans Niederberger) One of the key elements is the higher reputation of technical professions in continental countries (Hans Niederberger) lN EQS a: Case Study Acrylonitrile TAR in Seal Sands Background: A major plant overhaul (every 6 years) carried out in 2010. 700 contractors on site for 5 weeks. Acrylonitrile produces Hydrogen Cyanide. Plant integrity crucial Work StoppagesiLabour Issues: Contractors walked off the job, UNITE protest. ?in 30 years in this business, We never seen this happen before not in the middle of a major TAR event?. - Vandalism unprovoked malicious behaviour. Pilfering extensive and bold (cutting through perimeter fence) Lack of skilled labour we were short 28 welders. UK workers to ?ll these roles did not exist. Substance abuse: Drug and alcohol failure rates were five times higher than the USA. WAS If is difficult to see how the UK can compete in a global market if they have to grapple with these sorts of issues when, largely, competitors in other regions of the world do not have these problems.? IN Eos .. UK Skills - Suggestions - Historically the UK had Universities offering serious degrees Polytechnics with a technical bias Apprenticeships of a good quality It is a good system and works well today in Germany, Switzerland and Belgium Reduce the aspirational targets for University attendance ?get rid of the idea that everyone should get a degree regardless of whether it is worth anything? Apprenticeshipslvocattonal training should be taken very seriously and professionally. It is a RESPECTED route to employment in other countries and should be in the UK - a: TAX as Tax Sugges?ons - Reduce rate of corporation tax for manufacturing to 12% - Reduce higher rate of income tax - Employer NIC holiday for apprentices on an approved scheme lN a} Tax Personal Tax - UK is one of the highest of the developed economies (52l47% including NI 40% in Europe, 35% in USA) Corporate Tax 0 Direction of reform is encouraging Reduced rate to 23r?22% Enhanced relief Patent Box regime But 0 Legislation still too complex (latest Finance Bill is the largest ever! .. always tinkering) 85 Conclusions 1 - Manufacturing has been low on government's agenda for a long time - UK manufacturing has collapsed in the last 15 years - There is little to attract manufacturing investment into the UK today. No - in the last 15 years Germany?s employment level in manufacturing has reduced from 9m to 8.5m In the UK it has collapsed from 5m to 3.3m INEOS Views: An economy the size of the UK is not viable without a manufacturing base Addressing the decline in manufacturing is a top 10 issue for the UK government IN EQS as Conclusions 2 ?Must Dos? An Offer - UK industry must have competitive energy A Manufacturing Day Trip - The UK must have a skilled workforce Morning in Grangemouth one of the largest industrial - The pension regulator must pay equal regard to employee I complexes In the UK and employer - There must be more balance between employer and union I I - Afternoon in Cologne one of the largest industrial - Government should genumely believe that manufacturing Is complexes in Germany an important element of the UK economy Reduce tax on manufacturing companies . - Help In a general way megs 89 90 Environmental taxes on energy I Large User (1 00M) Large User(10MW) SmallUser(<1MW] Sweden Nomay . . Germany Additional Data Fra nce UK Belgium ?lMWh INEQS 91 - 92 UK Oil and Gas Liquids Production 100% 90% 80% UK GDP Components Cont?butlon from oil 5 gas within "Industry other" \Oil&gasUK I The rest 3500' 2500' me Nd 197m 1975 1930 1935 1990 1995 2000 2005 2010 2015 2020 ru'al Cont'ngant and new ?scavm'ss Sauna: ?bod ?5:159:19 2030 93 Manufacturing component of GDP INEQS Manufacturing component of GDP 40 3 5 Once: of 9008 recession 30 ?United Kingdom ,3 25 a Unlted States I Germany Switzerland 20 2 -- China I 15 I . Simiiar in mid-90Trend since 1995 ?China 40 35 - 30 ?Germany 96 25 Switzerland IN Case Study Comparison of USA 8. support - Government grant for Runcorn Regeneration - Capital cost over ?300m 300- - Government announced grant of ?50m in the press 250- - Actual grant only ?30.8m (not disclosed to the press) 1; - Plant completed on time and budget in 200' 0 Government insisted on Letter of Credit (ie grant goes into bank deposit {1 $150,? company does not receive) 5 150' $127.5m - So first ?15m received in 2009! Cost net receipt is ?10m 5o. 5 LC still in place for final ?15m - Plant now Operating for years 0? Cam Sources Cam ?Imam?! Bio Chlor 1N 9? . iN 93 Swiss Tax Back?up INEOS has sold over 360 Licences in 55 Countries - Headline rate 24.2% However - None Swiss income taxed at 9% - 35% of all income exempt - 80 net tax is 5.6% AN - MAN PEs PP PSFEPS Vinyls Chlorine - . INEQS . .TNEGS 1N Biography . Jim Ratcliffe Chairman INEOS Graduating in chemical engineering from Birmingham University in 1974, Jim Ratcliffe began his career in the chemical industry in accounting, marketing and business management with Courtaulds and Exxon. After fifteen years in manufacturing he moved into Venture Capital and in 1988 he took up the position as Director of Advanced Materials with the US Company Advent international, retaining a particular focus on the chemicals sector. - Jim put the experience gained at Advent to good use in 1992 when he led his own buy? out of a BP speciality chemicials business based in Hythe, UK. The company was to be called Inspec and as its Managing Director Jim initiated a number of acquisitions that saw the company grow significantly: two years later it was floated on the UK stock exchange. In 1998? Jim left Inspec to lead another buy-out opportunity, this time it was Inspec?s Antwerp facility, which was to become known as INEOS. For the past fourteen years Jim has concentrated his efforts on building INEOS as its Chairman and major shareholder. Under the management of Jim Ratcliffe, and the board of Capital, the company has established a strong track record of acquiring businesses and improving their profitability through safe operation, tight financial management and good customer service. Today, INEOS is one of the world?s largest chemicals companies, employing around 15,000 people across 51 sites in 11 countries. Additionally it has joint ventures with PetroChina, BASF and Total. Sales in 2011 reached $43 billion. February 2013 1N EQS Meeting with Jim Ratcliffe of INEOS Overview: Jim intends to discuss how the UK can attract more investment and arrest the decline in manufacturing. INEOS is an international petrochemicals company that is currently considering where to invest in ethylene and chlorine infrastructure. The company understands what manufacturers are looking for, and is committed to working with Government on the shared goal of promoting economic growth. Discussion is likely to focus on three key topics: 1) Energy Deca?rbonisation policies will cause energy prices to increase dramatically, and become less competitive over the next few decades. This will undermine economic growth, and hit energy-intensive industries especially hard. Energy- 'intensive industries underpin much of the manufacturing sector, making vital products. The UK cannot afford to lose businesses such as these that are crucial to the economy and contribute significantly to tax revenues. 2) Capital It is more difficult to secure capital in the UK than in countries such as Germany and the USA, whether grants or loan guarantees. This has effectively stopped some of projects in their tracks, and leads to investment going abroad. It is clear that the UK cannot afford to miss out on opportunities for economic growth. Jim will want to put forward possible solutions to this issue that affects business and inward investment across the UK. 3) Tax and Regulation Continuing on the broad theme of maintaining competitive business, Jim would like to highlight concerns about tax and regulation in the UK. The UK does not have the most competitive rates of Corporation Tax or personal tax. The regulation of pensions and industrial relations law also imposes unnecessary costs on employers and can make the withdrawal of unsustainable DB schemes difficult. In each of these key areas Jim will highlight possible solutions for the Chancellor?s consideration, and offer continued support in tackling these difficult issues. February 2013 IN Introducing INEOS Key UK Operations Run-09m and Northwich Grangemouth Products ?g Jan - '53! - Lined-p. I ?1 1* . H??lu 3' [f - A 4 'ff'Haw-.LP 5 lbw-?7?} .2 h. )r W?v?g?f?32h" Jr! a In. XI. [NEos Meeting with Jim Ratcliffe How the UK can attract industrial investment and promote manufacturing 10:30, Monday, 123sth February, 2013 Main issues: 1) Making energy prices competitive for industry - How decarbonisation policies will affect UK energy prices Securing the future of energy-intensive industries in the UK 0 Finalising short-term compensation Agreeing a long-term strategy - Shale gas: an opportunity for manufacturing 2) Making capital available through loan guarantees - International best practice - investment projects 3) Removing unsustainable Defined Benefit pension schemes - Making pensions regulation fairer for employers - Making industrial relations law fairer for employers RESTRICTED From: HM TREASURY Team: Ext: Date: II. "c . Briefing: Presentation from Jim Ratcliffe, Chairman and Jim Dawson, Non-Executive Director of INEOS To: CX cc: As per email copy list Purpose Presentation from INEOS, chemicals manufacturer: "How the UK can attract industrial investment and promote manufacturing Timing Monday 18 February 2013 Agenda The indicative agenda is: Making energy prices competitive the impact of decarbonisation on energy prices, the future of energy intensive industries, opportunities for shale gas) i Making capital available through loan guarantees (international best i practice, investment projects) I I I 3. Removing Defined Benefit pension schemes (making pensions regulation and industrial relations law fairer for employers) 1. Background INEOS have given this presentation to Jeremy Heywood, who recommended that they also present to you. 2. Obiective 0 We have no specific objectives for this meeting but you may wish to ask INEOS what they see as the future of the manufacturing sector in terms of the comparative advantage, and what action Government can take to bring this about. 0 You may also wish to ask their views on call for evidence on Defined Benefits schemes. 3. INEOS Company Background 0 INEOS is the 6th largest chemical manufacturer in the world, with an annual turnover of ?32.5bn and 15,000 employees. lt has 51 sites in 11 countries. 0 It is the largest chemical company in the UK, with 5 sites. It employs 3,500 permanent staff and a further 1,000 contractors. 0. INEOS was founded by Jim Ratcliffe in 1998 and grew largely through acquisitions. Its three founding partners Jim Ratcliffe (Chairman of INEOS Capital), Andrew Currie (Director of INEOS Capital and Chairman of INEOS Enterprises) and John Reece (CFO of INEOS Capital) own 80 per cent of the company's capital. RESTRICTED RESTRICTED INEOS moved its group and tax headquarters to Switzerland in 2000. The company estimated at the time a potential cash tax savings of around ?450m between 2010 and 2014, as a result of this move. 0 In January 2013, INEOS ChlorVinyls announced the oUtcome of an internal asset review in light of the impact of the prolonged economic downturn on European market demand. As demand for PVC in particular continues to be very weak, INEOS ChlorVinyls has decided to discontinue production from two of its UK plants. The Company will focus all UK PVC production at its Newton Aycliffe Site, which will facilitate closure of its small scale PVC unit and reconfiguration of its VCM unit at its Runcorn Site. This will lead to approx. 130 jobs losses. 4. Jim Ratcliffe Biography Jim held range of roles in marketing, accounting and business management with chemicals companies Courtaulds and Exxon. He was Director of Advanced Materials with the US company Advent International, with a focus on the chemicals sector. Jim then bought out a BP special chemicals business Inspec based in Hythe, UK, acting as Managing Director. Eventually, he bought out its Antwerp facility as INEOS, of which he is Chairman and major shareholder. 5. Briefing on Presentation Topics 5a. Support for Energy Intensive Industries (EIIs) Lines to take 0 The Government has announced its intention to exempt EIIs from the cost of Contracts for Difference under Electricity Market Reform (EMR), subject to state aid- - clearance. BIS and DECC's work to deliver this exemption forms part of the EMR programme, delivering on the same timescale and subject to further consultation in Summer 2013. The Government has also announced at Autumn Statement 2001 a ?250m package for electricity intensive industries to compensate them for EU ETS and Carbon Price Floor (CPF) costs. BIS considered the findings of their Call for Evidence, to seek evidence of trade and electricity intensity of industrial sectors, which will underpin targeting of the compensation. BIS is now consulting on eligibility criteria for the compensation. Compensation is now, subject to state aid clearance, at a stage where payments out would start in the Spring. 0 [What about 2015-76 funding, beyond the Spending Review?] Support is intended to be transitional while other countries catch up in pricing the costs of carbon emissions. As with [most] other policy areas, Government will make decisions on spending beyond 2014/15 at the next spending review, examining the need for on- RESTRICTED 2 RESTRICTED going support and taking into account affordability and value for money, and the impacts of EMR which will be implemented by 2017. Background EMR exemption for Ells At Autumn Statement 201 1, the Government committed to explore ways to mitigate the impact of electricity costs arising from EMR on the most Ells. In order to maintain the competitiveness of the UK as a place to do business the Government, on publication of the draft Energy Bill in June 2012, formally announced its intention to exempt Ells from the cost of Contracts for Difference under EMR, subject to state aids clearance and further consultation. This will involve a redistribution of costs away from Ells to other industry and domestic consumers, but no additional cost. EMR costs are capped under the HIVIT- agreed Levy Control Framework. Government announced it was minded to implement the exemption through the operation of the supplier obligation, but work is currently being undertaken. DECC and BIS are working up options for eligibility for the exemption (how to identify Ells that will be exempt from CFDs), and how the exemption will be effected or ?paid? to eligible industries in practice, and is discussing these issues with energy companies. EIIs compensation from EU ETS and CPF costs The Government will provide up to ?250m over the current Spending Review period to mitigate the impacts of the CPF on electricity costs to businesses that are electricity intensive and operate in internationally competitive markets from April 2013. This will be implemented through compensation for the indirect EU Emissions Trading System and indirect carbon price floor costs. BIS and DECC have consulted on eligibility criteria to ensure the most at risk industries are captured. Compensation will be subject to EU state aid rules. BIS submitted a state aid pre-notification to the European Commission in September 2012. (The consultation closed 21st December 2012.) Public communication is that the first compensation payments to industry would start from Summer 2013 BIS is on track to make this deadline in mid?2013, subject to state aid clearance. State aid clearance expected by March 2013 at the earliest. A delayed or rejected state aid clearance for compensating Ells for the effects of the CPF is a risk to successful implementation. 5b. Shale Gas Lines to take 0 The Government expects that gas has will continue to play a major role in our electricity mix over the coming decades, alongside low?carbon technologies as we decarbonise our electricity system. RESTRICTED 3 RESTRICTED - Gas currently forms an integral part of the UK's generation mix, accounting for nearly 40% of all generation in 2011. As a reliable, flexible form of generation, gas is essential to our security of electricity supply, especially as we have increasing quantities of intermittent and inflexible renewable generation on the system. It emits less than half the C02 of coal and has helped the UK cut its carbon emissions. 0 The Government will set up an Office for Unconventional (shale) Gas (OUGO) which will join up responsibilities across government, provide a single point of contact for investors and ensure a simplified and streamlined regulatory process. DECC are in the process of setting up the office, which will consult closely with the industry forum. Background 0 You announced in your conference speech in October that HMT will engage with industry to develop a targeted tax regime for the shale gas industry to encourage investment. This will report at Budget. 0 We are currently considering the case for benefits of hosting shale development. Shale development in the UK is in its early stages. Only one company is currently active in the Cuadrilla, who have an exploration licence for the Bowland Basin. There was a moratorium on fracking in the Bowland after exploration caused two small seismic events. Permission to resume fracking was granted on 13 December 2012. It is as yet unknown whether the gas flow rates will be sufficient to allow production. Should extraction prove possible and the costs low enough to make it economically viable, DECC does not expect there to be significant production until the beginning of the next decade. Timelines 0 Autumn Statement 2012 a Gas Generation Strategy published 0 Budget 2013 report on tax regime and further detail on OUGO expected 5c. Making capital available through loan guarantees Lines to take 0 Large companies have relatively good access to credit as they are able to borrow from a variety of sources, including capital markets. Although there has been a fall in bank lending to large companies, part of this may be explained by the increase in borrowing from alternate sources. 0 UK corporate bond issuance has been very strong in 2012, totalling over ?40 billion, the second highest figure in the last ten years. a The Government has launched the Funding for Lending Scheme (FLS) to boost bank lending to UK households and non?financial businesses. The scheme is designed to reduce the funding costs of banks and provide them a strong incentive to increase their lending. RESTRICTED 4 RESTRICTED UK Export Finance provides guarantees of loans given to buyers of UK exports. UKEF also has an Export insurance Policy against non?payment by overseas buyers of UK exports. This can be used for commodities. For example UKEF provided insurance Brazil for exports of potash from the Background The FLS is run by Bank of England, with the approval of the Government, as part of its remit to maintain monetary and financial stability. The Bank of England is providing funding to banks for an extended period at below current market rates. 2Q banks have signed up so, Participating banks can currently borrow over ?70bn from the Bank of England. 6 banks have borrowed ?4.36bn of funds from the Bank up to end of September. Participating banks increased their net lending by ?0.5bn in Q3 2012. Of them, 24 banks expanded their net lending by ?7.6bn and 9 banks contracted their net lending bv bn. 5d.Removing Defined Benefit pension schemes Lines to take I?m aware that pension deficits have been increasing markedly as investment returns have fallen over the last couple of years. The scale of these increases is striking and it is clear that they have the potential to have large macroeconomic impacts. That's why I have taken an interest in this debate. lVly officials are working closely alongside DWP to understand these impacts, and how the regulatory system responds to increasing deficits. I know that you recently met with the EST to discuss this issue and mentioned the recent increase in INEOS's pension scheme deficit. Today?s meeting is a good chance for me to a) get a better sense of the impact regulation is having on your investment plans and b) your thoughts on the key elements of the recently launched call for evidence on this. Background The CBI, NAPF and some employers have raised concerns about the burden of pension scheme funding in the current climate, and have suggested that the Pension Regulator?s remit be changed in order to allow more flexibility in balancing business investment against support for the pension scheme. In Autumn Statement 2012, the Government announced that it is determined to ensure that defined benefit pensions regulation does not act as a brake on investment and growth, and_that it would consult on the options of: RESTRICTED 5 RESTRICTED whether to allow the smoothing of asset values and liabilities in defined benefit scheme funding valuations; and . whether to introduce a new statutory objective for the Pensions Regulator focusing on the long?term affordability of deficit recovery plans to sponsoring employers. Update - As you will be aware, DWP have now launched their ?call for evidence? on defined benefit (DB) regulation, seeking evidence and views on options listed above. The smoothing aspect of this consultation is likely to attract the most attention. a The emerging (but far from final) consensus between and DWP officials on the key policy choices for smoothing is provided below. We should look to test views on these choices at the meeting: 0 Assets vs. Liabilities. The most consistent approach would be to smooth both asset and liability values, since theyjointly determine volatility in pension deficits (which are simply the sum of the two). Smoothing liabilities only would achieve the largest reduction in deficits. Voluntary vs. Compulsory. Both HIVIT and DWP believe that smoothing would . need to be voluntary to fit with the relative flexibility of the current regulatory approach. Length of Smoothing. have proposed a 10-15 year smoothing period. However, if the objective of smoothing is to even?out the effects of QE or limit the effects of temporary market turbulence, then that would point to a shorter period of 2-5 years. - Lock-in. If we want smoothing to have a neutral affect on employers? pension contributions over the economic cycle a reduction in contributions now to be off?set by an increase later when gilt yields are increasing this would point to having some degree of lock?in. This would mean companies that adopt smoothing now would have to stick to smoothing for a number of valuation cycles eg 2 valuation cycles would mean they would have to keep smoothing for 6 years. Start-date for smoothing. lf smoothing is introduced, our position (and the CBl?s) is that any company who has yet to finalise their pension contribution plans (their 'valuations?) by the start?date should be able to adopt smoothing. DWP and the Pensions Regulator would prefer that only companies starting their valuations after the start date should be able to smooth. As well as testing these policy choices with INEOS, we should also seek their views on a new objective for the regulator and what formulation this objective should take. DWP's call to evidence suggested the objective should focus on the long?term affordability of deficit recovery plans to sponsoring employers but was open to suggestions on other formulations. RESTRICTED 6 RESTRICTED Tom Crotty, Group Director at INEOS attended a meeting hosted by the EST with the CBI and other employers (including BT, British Airways, Siemens and National Grid) on 7 February to discuss this issue. He said that pension scheme deficit had risen from ?25m to ?340m, despite contributions having risen from 9% to 33%, and that the scheme liability increases as new employees are hired. . The Chemical Sector The chemicals sector employs over 104,000 people in the UK, with a labour productivity more than double the UK average. The chemicals sector generated ?9.4bn in value added in 2011, around 6per cent of total manufacturing. The chemicals sector contributed to a total of ?658m investment in 2010, accounting for 4 per cent of all business in the UK. The UK chemicals sector annual sales was over ?40bn in 2011 and accounted for almost 11 per cent of all UK manufacturing exports. The sector has a consistent trade surplus with circa 90 per cent of companies exporting. 90 per cent of UK chemicals output were exported; 60 per cent of these exports were to the EU. The plastics and rubber sector had a combined turnover of over ?21 bn, and generated almost ?8bn of value added in 2011, equivalent to some 4 per cent and 3 per cent of all manufacturing respectively. The plastics and rubber sector employs over 150,000 people in almost 6,000 companies. Close to ?7bn of plastics and rubber products were exported from the UK in 201 1. Approximately 50 per cent of all products are now packed in plastics. The UK plastics and rubber sector is broadly on par, in terms of productivity, with our main European partners/competitors, and is the second largest producer in the EU of plastics products after Germany and third largest in rubber processing after Germany and France. Larger UK?based companies include lneos, BASE, Dow, Sabic, GrowHow, Shell, BOC, Procter Gamble, Air Products, Unilever, with major clusters at Wilton (Teesside), Runcorn (Cheshire) and Grangemouth (near Edinburgh). RESTRICTED 7 From: Sent: To: Cc: Subject: Hi Thanks for this briefing CX met with INEOS this morning: 1) Their pitch is that UK manufacturing has declined markedly over 15 years and they wanted to make sure Govt knew why. On why INEOS relocated to CH, JR explained that INEOS asked the Govt in 2008 to delay their VAT payment. The Govt refused, which the company saw as a snub to UK manufacturing. JR estimated that the move saves INEOS almost half a billion pounds over a five year period. Following introductions, they talked through the 90 page presentation that I passed onto you regarding the reasons for the decline of UK manufacturing and why DE/Belgium are much more attractive. During discussion, they emphasised the importance of shale gas in driving down the cost of electricity in the US. CX explained his intention to stimulate the sector in the UK. JR cited his key complaints about what more could be done to help UK manufacturing, particularly chemical. They discussed: high energy taxation in the UK, noting that their plant in Grangemouth, Scotland, requires the same amount of electricity as the City of Liverpool. More aggressive courtship of manufacturing companies by US_and DE Governments. They asked for a lower corporation tax rate specifically for manufacturing. CX not sure it is possible to differentiate by sector? They made an open?ended offer for CX to visit a manufacturing plant in his constituency (copying press office). I have contact details should you wish to do this. .1 and No specific action points but CX asked that we consider their recommendations in more detail. If there are ideas which could be worked up further then that would be good. Thanks, Sent: 15 February 2013 16:59 To: Cc: - 3d] Subject: RE: [commission] CX Meeting with INEOS Hi The briefing is attached, along with supporting materials for INEOS themselves. Apologies for the delay. Please note that Jim Dawson will now be joining Jim Ratcliffe, in case you weren?t aware. HM Treasury From: Sent: 13 February 2013 09:06 To: Cc: L. Subject: [commission] CX Meeting with INEOS Hi CX is meeting with Jim Ratcliffe from INEOS on Monday morning to discuss UK manufacturing and the chemical industry. Please could you provide short briefing for noon on Friday? Be great to learn a bit more about the profile of INEOS i understand they relocated out of the UK in 2010), Mr Ratcliffe, the profile of the chemical industry at present and any recent media comments/pieces of interest. Very happy to discuss of course. Thanks,