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Sun November 28 2021

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Seeing Red

12 Nov With six months to go until the end of the red diesel rebate for construction users, TCI asked plant hirers what the new rules would mean for them. David Taylor reports

When the government pulls the plug on rebated red diesel in April next year, businesses in the construction industry that currently enjoy the 47p-per-litre tax rebate will have to switch to ordinary ‘white’ diesel, taxed at the full rate. That means they will be paying five times as much in fuel duty as they do currently.

Most construction plant runs on diesel; projects exploring alternatives, such as battery power and hydrogen, are still in their infancy. Therefore most plant hirers use red diesel – particularly those that hire out operated plant. Switching to white diesel will significantly increase costs; and of course, those costs must be either absorbed or, more likely, passed on to the customer.

This article was first published in the November 2021 issue of The Construction Index Magazine. Please sign up online 

Even those plant hirers that just hire out the machine, which must be fuelled by the customer, will find that their hire rates will come under pressure next year. With increased running costs, customers will be looking for the best deal. The days of rate slashing and suicide bidding could be poised to return.

The deadline for switching from red diesel to white is now less than six months away. But is the industry ready? How much do plant hirers appreciate the impact it will have? And what are they doing to prepare themselves? We invited UK plant hirers to get in touch and tell us how they see the future without red diesel.

The clearest message that came across was that a majority of the industry is not prepared for the switch. Almost two-thirds of the 120 emails we received within the first week of putting the call out said they were not ready. Some of these clearly know what they have to do, but others are still in the dark. Indeed, some are still not convinced that the government will go through with it.

As one hirer put it: “Like other companies we have probably put it on the back burner at present and, if it happens, will make changes.” Others were more explicit: “We are waiting to see if it will come into force or be scrapped,” said one. Another simply said: “We’re waiting to see if it happens.”

This is a risky path to follow – the government has given no sign that it is even considering amending the proposed changes. Most of the plant hirers who responded to our call for comments are making plans, such as warning customers of likely increases in costs and hire rates. “We have advised all of our clients of the increase in the cost of fuel which will add to the present rate of inflation that is currently running at 3.5% per month,” explained one London-based hirer.

Nevertheless while this respondent believes his company is prepared for the change, he is not optimistic for the industry at large: “We believe that the increase will be the final nail in the coffin for construction and equipment rental as we know it,” he said. “It’s never just one thing that causes a company to collapse but a lot of negative things all happening at the same time.”

Many hirers are talking to their customers and warning them that costs are likely to increase. Some even say they have already started raising their rates to cover the extra expense. Many have also started making the practical preparations necessary for switching from red to white:

“We are drafting a written document explaining the changes next April to be distributed to all of our staff,” explained one Norfolk-based hirer. “Our red diesel tank will be decommissioned and emptied before the deadline with the fuel hose removed. All plant and machinery will have their fuel lines washed through and filters changed and white diesel or another fuel will be used before the deadline.

“This is going to increase our running costs and push up prices and possibly make the recycling part of our business unprofitable”. And this might mean closing down this side of the business and laying off staff, he added.

This article was first published in the November 2021 issue of The Construction Index Magazine. Please sign up online 

In fact only just over a quarter of our respondents confirmed that they had made any preparations for the end of red diesel. These ranged from the comprehensive measures mentioned above to “We’ll just switch from red to white”.

A significant number of hirers mentioned the alternative use of hydro-treated vegetable oil (HVO), a bio-fuel made mostly from recycled cooking oil. This has the benefit of being much greener than diesel, with up to 90% lower greenhouse gas emissions and 30% fewer particulate emissions. Not only that, it’s also a simple ‘drop-in’ substitute for diesel and can be stored in the same tank.

But while the government says that it is keen to encourage the wider use of HVO as part of its move away from fossil fuels, HVO is currently about 10% more expensive than white diesel. And it’s taxed at the same rate.

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One problem, identified by several hirers, is the impact on term contracts already agreed. “We have to rely on clients paying the increased costs on ongoing projects for which we are on a fixed contractual basis,” explains one hirer. Others have taken the precaution of qualifying their tenders to account for the cost increase.

Among our respondents was Rory O’Connor, chief technical officer for the Road Surface Treatments Association, who said: “Our members, especially our subcontractor members…who are in long-term fixed price contracts, will endeavour to recover this extra fuel cost from the larger organisations they are contracted to.

“But from past experience when legitimate price increases occur for the subcontractor, there is sometimes a reluctance from main contractors in reimbursing these extra costs down to the supply chain despite having been reimbursed for these extra costs from their publicly-funded contracting authorities,” he added.

On the question of the impact the end of the red diesel rebate will have on the industry there is widespread agreement. Costs will go up, of course, and it will be harder to make a living. Some hirers are pretty sanguine about this: “We will have to increase our rate and it will become more expensive for the customer,” said one – who spoke for many.

Others believe the cost hike will be far more serious: “No one in the construction plant hire sector can afford to absorb the tens of thousands of pounds in extra fuel tax,” said one. “The extra cost to our customers will affect the viability of some projects which will then mean some projects will not proceed,” said another.

But there’s one consequence of having to switch from red diesel to ordinary white diesel that really bothers the sector, and that’s theft.

Plant hirers tend to be sensitive on the subject of theft – they’re frequently targeted. And virtually everybody agrees that the end of the fuel rebate will make things much worse.

As one hirer succinctly put it: “I think sites will be targeted by thieves, because once they have the white diesel out of the plant machinery and into their vehicles, no amount of roadside checks can link them to any crime, because they have the correct fuel on board.”

“Thieves already steal the red diesel; when they see we’re storing white it will be open season,” said another.

One hirer pointed out that the police are already over-stretched and under-resourced and that the end of the red diesel rebate for construction users will kick-start a new crime-wave. His solution – which was also proposed by three other respondents – was simply to keep the fuel red but just charge the full rate of tax.

Sounds like an easy fix, but while rebated red diesel will still be available to agricultural users, fairgrounds and pleasure craft, taxing it at different rates for different users would simply open other avenues for tax cheats.

 So from next April it looks pretty certain that plant hire costs are going to rise and fuel theft become a greater threat. Some in the sector are prepared to take it on the chin, but nobody’s happy about it.

Several hirers are unhappy with the way the government has handled it: “We only realised that legislation had been passed last week,” complained one hirer. “We thought it was still out for consultation, so we have not made any plans and are upset that it was pushed through at the height of the lockdown.”

And many others genuinely fear for the future. One East Anglian plant hirer and dealer said that he is simply getting out of that side of the business and has sold off his fleet of excavators and dumpers.

At least he has a second string to his bow. Others are not so lucky: “We are yet to decide whether to carry on,” said one hirer. “It may just be the straw that breaks the camel’s back.”

This article was first published in the November 2021 issue of The Construction Index Magazine. Please sign up online 

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