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LEAD Innovation Blog

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Date: 26-Aug-2019
Posted by: Julian Eberling
Category: logistics

Flagging out in logistics and its negative effects

The practice of flagging out in international freight transport has increased considerably since the end of the 1990s. You can read in this article where the reasons for this are to be found and what effects are associated with it.

Reasons for the increasing flagging-out

Flagging out is the registration of trucks or semi-trailers in another EU member state for the use of cost advantages. Especially since the enlargement of the EU in 2004, nothing has stood in the way of flagging out to low-wage countries.

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In many cases, the tendency to flagg out is due to the fact that Austrian company locations are no longer competitive in European competition. A study conducted by the Vienna University of Economics and Business Administration identified the most important of these in a survey of Austrian transport companies:

  • the level of domestic non-wage labour costs and direct labour costs
  • the amount of vehicle tax and mineral oil tax
  • access to driving personnel or drivers
  • depreciation charges
  • maintenance and repair costs
  • high bureaucratic effort in the home market
  • restrictive regulations and high administrative penalties

 

Share losses in international freight transport

Over the last 10 to 15 years, domestic Austrian transport services carried out by Austrian lorries have remained relatively stable. However, international transport services are in a strong decline, although international trade with Austria has intensified. This development can also be observed in Germany, Denmark and Sweden.

The transport performance of Austrian HGVs in cross-border road freight transport was still 38 per cent in 2008, compared with only 20 per cent in 2016. Austrian companies have lost most of their shares to transport companies from the new EU member states such as Bulgaria, Romania or Hungary, which have more than doubled their cross-border transport services. Their share rose from around 30 per cent in 2008 to around 50 per cent in 2016. How high the share of Austrian trucks flying the flag in this segment is was left open in the Unicredit study.

grenzüberschreitender Transport 

According to internal industry estimates, around 50 percent (2014) of truck fleets, mainly heavy trucks and articulated trucks, were registered in other EU states in 2014. An indication of the practice of flagging out is also the continuously decreasing number of heavy trucks and articulated lorries in Austria from 2005 to 2015.

The increase in the number of new registrations and existing registrations in 2016 and 2017 was partly driven by demand. The number of new registrations fell again in 2018. Whether this can also be seen as an indication of less out-of-flag trucks is currently not sufficiently documented and remains open. It therefore does not appear at the moment that the loss of market share in cross-border freight transport could be stopped.

 

Loss of tax revenue

Studies show that flagging out costs the Austrian government 55,000 euros per truck per year. Austria alone will not be able to find a satisfactory solution, as fair competition requires uniform rules throughout the EU. Reducing non-wage labour costs in Austria could, however, invalidate one of the main arguments most often put forward in favour of flagging out and increase competitiveness vis-à-vis low-wage countries.

 

Social dumping through freedom to provide services and freedom of establishment

Logistics associations are increasingly concerned about the development of the industry in Europe. The main focus here is on complete fleets that are licensed in Eastern Europe, but are stationed permanently in Germany or Austria, for example, and are also dispatched from there. Taxes, labour and social costs for these trucks are at Eastern European low wage and social standards, although in Germany and Austria the minimum wage, social security contributions and taxes would be due.

In fact, this would be legalized undeclared work with correspondingly poor working conditions, which, disguised as freedom to provide services, virtually floods the markets, according to the German Federal Association for Road Haulage, Logistics and Waste Disposal (BGL). The freedom to provide services and freedom of establishment, which are basically permitted in the EU, would be misused for social dumping. An obligation for companies to set up in the country in which they offer services on a permanent basis and predominantly could remedy this situation.

 

Relocation of jobs abroad

The personnel expenditure per employee in road freight transport in Austria is almost 40 percent higher than the EU28 average. For example, the average hourly wage in Austria is 15 euros, in Poland and the Czech Republic 5 euros and in Romania and Bulgaria only 3 euros (source: Eurostat). Flagging out therefore also leads to the relocation of jobs to Eastern Europe. Jobs of domestic truck drivers are increasingly being lost.

ArbeitsmarktSource: Labour market for drivers, AMS Austria, 2016

 

Lack of qualified specialists

The shortage of qualified truck drivers has worsened in recent years. Flagging out plays an important role in this context, as it is much more difficult for companies to train employees from foreign countries and in different languages.

 

Conclusion: Measures against flagging out

Although individual companies are returning to Austria, this effect could probably be intensified if, in the event of violations of social dumping rules, the clients - i.e. the industry, but also the freight forwarders - could also be held responsible. In addition, there is an urgent need to create more attractive location conditions, in particular by reducing non-wage labour costs, in order to offer transport companies competitive conditions in Austria. It remains to be seen whether the legislator will react appropriately to this challenge.

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Image Source Cover Picture: https://pixabay.com/de/photos/lkw-transport-logistik-1030846/ 

Julian Eberling

Born in Vienna. Since 2018 "Certified Service Design Thinker" he has been pursuing his passion as Innovation Manager at LEAD Innovation.

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