Competition (Government Policy)

– in the House of Commons at 1:41 pm on 8 August 1980.

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Photo of Mr Nigel Forman Mr Nigel Forman , Sutton Carshalton

I am glad to have this opportunity to air the important and complicated subject of competition policy. I look forward to hearing what my hon. Friend the Under-Secretary of State for Trade has to say in reply. I hope that my hon. Friend will not try to develop the whole of the Government's case in what must inevitably be a short speech. It is a subject to which we can return on subsequent occasions, both here and elsewhere.

My reasons for wanting to focus attention on competition policy can be stated fairly clearly. First, as my hon. Friend well knows, the general trend of the 1970s was towards increased concentration. According to Mr. Gordon Borrie, the Director General of Fair Trading, it is likely to increase still more in the 1980s. That is the point that he made in his introduction to the sixth annual report of the Office of Fair Trading.

The second reason is that the United Kingdom appears to be one of the most highly concentrated economies in the Western world yet, sadly, has had one of the poorest economic performances over the years. It is possible—indeed, likely—that those two facts are connected.

The excellent Liesner report on the subject, which appeared back in 1978, contains in paragraphs 3.7 and 3.8 the observation that according to EEC data there is a higher concentration in the United Kingdom than in France or Germany, notably so in such sectors as paper, pharmaceuticals, agricultural machinery, office machinery, textile machinery, civil engineering, handling equipment, tyres, the food industries and food distribution, although it applies to other sectors as well.

It is also notable, according to Mr. Liesner, that the growth in aggregate manufacturing concentration in Britain was accounted for to no great extent by increasing plant size. The explanation for the increasing concentration appears to lie rather in the average number of plants owned by the largest firms, which increased from 27 in 1958 to 72 in 1972. Therefore, even though those figures are now a little out of date—my hon. Friend may have access to more recent figures—there are disturbing possibilities that this country's poor economic performance may be connected with this unusually high concentration.

The third reason is that, other things being equal, concentration tends to diminish competition. However, this Government, of whom I am a strong supporter, believe in the beneficial effects of competition. We should try to implement our beliefs.

Fourthly, concentration in the public sector is largely a consequence of nationalisation. Steel and motor cars are two examples that come to mind. When one considers the public sector, one cannot see any notable benefits from concentration. Indeed, it appears to have produced monopoly behaviour, economic and social rigidity and to have diminished efficiency all round.

Fifthly, concentration in the private sector—whether in the form of scale or complex monopoly—demonstrates clearly that such things can be against the consumer interest and lead to various forms of waste and inefficiency. I accept that in many cases we are concerned with oligopoly rather than pure monopoly. Nevertheless, I am sure that my hon. Friend will agree that oligopoly can be as harmful to wider interests as pure monopoly.

I am worried because the situation has implications for our fight against inflation. In the private sector, too many firms in oligopolistic positions have the ability and opportunity to pass on their costs rapidly and without challenge to the consumer. That, coupled with the monopoly bargaining power of many trade unions, lessens an employer's natural resistance to excessive wage claims. It therefore increases the cost of living to a greater extent than would otherwise be the case.

I recognise that the effect can be offset by the discipline of international competition in those sectors vulnerable to it. Table 10 of annex A of the Liesner report is based on 1972 figures. However, I am sure that the present position is not significantly different. In many cases, even when concentration ratios are adjusted for the effects of foreign trade, considerable oligopoly power remains in many sectors of private industry. The Department of Trade should pay continual attention to that.

I should like to give a few examples of current forms of concentration so that the House can understand the position. If I were a member of Congress, I should be able to submit that this should be read into the record, and I would not have to go through the details. Unhappily, we do not have that procedure. I shall give just a few examples. The examples are taken from that excellent document "The Business Monitor," "Statistics of Product Concentration of UK Manufacturers". From looking at the figures for 1977, one notices that four salt firms had 100 per cent. of total sales. Seven sugar firms had 100 per cent. of total sales. Seven margarine firms had 100 per cent. of total sales. Seven tobacco firms had 100 per cent. of total sales. Six synthetic rubber firms had 100 per cent. of total sales. There are 27 fertiliser firms, of which the top five had 91·2 per cent. of total sales. There are 15 surgical bandage firms, of which the top five had 90·6 per cent. of total sales, and nine photographic chemical material firms, of which the top five had 90·3 per cent. of total sales.

I shall not weary the House by giving other examples, but that is the flavour and the dimension of the problem. One can argue endlessly about where the net advantage lies in such situations, but it seems quite clear from paragraphs 3·36 and 3.37 of the Liesner report that there are distinct disadvantages in this kind of concentration. The academic studies reviewed by Liesner, and the practical considerations which are mentioned in paragraph 6 of annex C in the same report all argue very strongly the need for a stronger competition policy.

Do the Government look favourably on the three broad conclusions of the Liesner report which are adequately summarised in paragraph 3.47 of that report? The first point was that there would seem to be a strong case for a more careful appraisal of mergers; the second was that some sectors of the economy are now dominated by a few very large firms and that these may give rise to worries about economic power; and the third was that certain practices of dominant firms are aimed at restricting competition and, therefore, are unlikely to benefit consumers. The third recommendation also included the point that these forms of behaviour were often unsuited to case-by-case investigation and might be better dealt with on a more general basis.

What should be the Government's response? I agree with my right hon. Friend the Secretary of State for Trade in his statement of 1 July that the onus of proof is now on those who argue for greater concentration rather than the other way round. If that is so, why have the Government been so cautious in their response so far to the Liesner recommendations? Is the Secretary of State's statement of 1 July his last word in response to paragraph 5.19 of Liesner'? Is there not a role for non-statutory guidelines being provided for the Mergers Panel to ensure a more critical assessment of proposed mergers, as suggested in paragraph 5.20? Why has the Department of Trade ruled out, for the present at any rate, further legislation on mergers amending the 1973 Fair Trading Act, especially sections 69, 72 and 84, as suggested in paragraph 5.21 of Liesner? Is it sufficient to reaffirm the policy contained in the 1973 Act or should we go further along the lines recommended by Liesner?

If my hon. Friend tells me that maintenance of the status quo is the policy for the present, is his Department satisfied that a sufficient number of references are being made to the Monopolies and Mergers Commission under the 1973 Act and other relevant legislation? Related to this, is his Department satisfied that the Monopolies and Mergers Commission itself is taking a sufficiently tough line with the cases that are referred to it? Here I am thinking of the recent example of Vickers Limited and Rolls-Royce Motors. Some of the mergers seem to have little sensible justification. In other words, are there signs of existing policies leading to better-thought-out mergers and to the avoidance of mergers the effect of which is mainly to stifle market forces by producing what the Secretary of State for Trade described as "even larger and more unwieldy concentrations of power"?

Obviously, the Government's Competition Act 1980 is a welcome refinement of the law dealing with anti-competitive practices. I welcome the new powers in the Act which enable the Secretary of State to direct the Monopolies and Mergers Commission to investigate nationalised industries. As a Member of Parliament for a South London commuter seat, I particularly welcome the investigation into British Rail's commuter services in London and the South-East. All this is very good, but I wonder what consideration the Government have given to following the West German Government's example in the fourth revision of their Competition Act which was adopted in February 1980. The West Germans reduced turnover ceilings of target companies to about £10 million, compared with our own ceiling of £15 million. They have introduced new controls on market domination aimed at hitting conglomerates and vertical mergers in the interests of small firms and they have introduced a new doctrine, the aim of which is to stop existing oligopolies from getting stronger. The most recent formulation was provided by the Supreme Court in the Federal Republic of Germany when it banned the acquisition of Sachs by GKN.

Is there not a case for making the prohibition of mergers stricter, more predictable and even more legalistic on the American pattern? Perhaps my hon. Friend, when he replies, will make the Government's case setting out the reasons why his Department rejects that approach. What are the arguments for the Government's combined conduct and structural approach to which reference is made in their document?

I wish to make it clear that I recognise that there are sectors of the economy where further concentration is sensible, even vital, to our international competitiveness—for example, motor vehicles and turbo-generators. It is noteworthy that the figures on concentration can be misleading because of the extent of import penetration in Britain. Yet there are clearly other sectors where it can be detrimental to the interests of consumers, small firms and the nation as a whole. I hope that the Minister, his Department and the entire Government will encourage a clearer and more sustained effort by the Monopolies and Mergers Commission and all concerned to differentiate between the two and so strike the best balance of advantage for Britain.

My position was well summed up in the excellent words of Mr. Borrie on page 13 of the report. He said: I believe that experience here and in other countries shows fair trading is most likely to occur where the opportunities for the abuse of market power are limited, where innovation is not frustrated by the ability of existing companies to block entry of new companies to the market, and where entrepreneurs are encouraged to accept the desirability of consumer choice—and seek to meet this choice at the right price and on time. I concur with those sentiments. I look forward to hearing what my hon. Friend has to say.

Photo of Mr Reginald Eyre Mr Reginald Eyre , Birmingham, Hall Green 2:17, 8 August 1980

I am grateful to my hon. Friend the Member for Carshalton (Mr. Forman) for giving us the opportunity to discuss the Government's competition policy. I noted carefully many of the points that he made during the course of his interesting speech.

The promotion of competition has been one of the keynotes of our programme. One of our first legislative steps was to introduce a major new measure to control restrictions of competition—the Competition Act 1980 — which received Royal Assent earlier this year. Nor has our concern been limited to competition policy in the narrow, technical sense. We have been determined to introduce a more competitive approach wherever the opportunity presents itself, as shown, for instance, by the recent decision by my right hon. Friend the Secretary of State on the air route from London to Hong Kong. Competition is the best stimulus to alert and vigorous management and responsiveness to the needs of the consumer.

The emphasis on competition is an integral part of the Government's approach to industrial and economic affairs. We believe that individuals and commercial enterprises themselves are best qualified to take decisions about the allocation of resources and to take initiatives for new developments. Government bureaucrats cannot do that for them.

In a competitive environment, firms are guided by the information about available resources and relative costs channelled from countless individual sources through the system of the market, but the market will give clear and reliable signals only if it is operating freely and without distortion. There are various sources of distortion. Intervention by the Government is one, and we are determined to reduce such intervention to a minimum. However well intentioned, it is bound to distort the basis of economic decisions. But it is not the only threat. Economic history shows that enterprises themselves are naturally inclined to look for ways of limiting competitive pressures.

Dominant enterprises, whether in public or private hands, may be able to reinforce their own position—for instance, by action to deter the growth of smaller rivals. That is a threat to the source of innovation for the future, on which long-term economic health depends. Moreover, in the absence of restraints, even enterprises which individually enjoy no great influence may by concerted behaviour seriously weaken or distort competition.

The danger of restrictions of competition in no way reduces the desirability of the market approach, which we advocate. There are those who think that when they have discovered the existence of monopolies or cartel behaviour they have exposed and refuted the whole free enterprise system. That is a gross misconception. It is precisely those who believe most strongly in the merits of the market system who have seen most clearly the dangers of uncompetitive behaviour and the need for vigilance against it.

There is an element of self-delusion, if not insincerity, in those who use the imperfections of the market system as an argument against the system itself. There is no real alternative. To replace the marginal distortions and imperfections of the market by the rigidity of State planning and control would be to ruin all our hopes of maintaining good living standards for all our people in a free economy. No one with any sense of reality can believe in the perfect goodness, wisdom, foresight and efficiency of State-dominated systems.

We must, therefore, do what we can to help the effective working of the market, not to abandon it and lose its overwhelming benefits. We recognise that restrictions of competition are liable to arise, and although in a healthy economy there are strong self-correcting mechanisms they may work too slowly for our purposes. At this point the Government have a legitimate role to play as the guardians of the public interest. The legislation against restrictions of competition and abuse of monopoly is the result, and Governments of both main parties have contributed to it over the years.

The every existence of that legislation is a deterrent to abuse. Its value and effectiveness are not to be measured solely by counting the number of cases considered, the number of orders made and the number of adverse findings. There is more to be done, affecting both the private and the public sectors, but it must be acknowledged by any independent commentator that the economy would have been in worse shape without this legislation.

Clearly, we support the case for strong and effective competition legislation. Nothing could show that better than the Competition Act, which provides a flexible new instrument for the investigation and control of restrictions of competition. It is also relevant to our approach to monopoly privilege in the public sector.

The Government have shown their determination to expose nationalised industries, wherever possible, to greater competition. The recent statements by my right hon. Friend the Secretary of State for Industry on the future of the postal and telecommunications monopolies are examples. At the same time, it is inevitable that many activities of nationalised industries will remain shielded from the full rigours of the market place. We have, therefore, provided for periodic inquiries into the running of these bodies, with a rapid and precisely focused procedure for investigation.

The Competition Act gives my right hon. Friend the power to refer to the Monopolies and Mergers Commission questions concerning nationalised industries' efficiency and costs, standards of service or possible abuse of a monopoly situation. The legislation also provides suitable powers to ensure that, where appropriate, the commission's recommendations will be implemented.

The commission has already completed a most valuable inquiry into the inner London letter post and is currently investigating British Rail's London and South-East commuter services and the Central Electricity Generating Board. We are planning a regular programme of public sector references, and we have already announced a further investigation to be launched in the autumn, this time into the Severn-Trent water authority.

I turn to consider some of the interesting points raised by my hon. Friend. The basic issue that he raised is "Where do we go from here?" We have had the Competition Act, but we must not rest on our laurels.

We made it clear during the passage of the Competition Bill that we were continuing to review the case for further legislation; in particular, we were studying the proposals in the two valuable Green Papers published as a result of a review by an official working party under Mr. Hans Liesner. I noted my hon. Friend's references to those reports. I will explain briefly where we stand on these proposals, beginning, if I may, with the Green Paper on restrictive trade practices policy.

The general theme of this report was that the restrictive trade practices legislation, though effective, was too rigid and formalistic. It considered the alternative of a radically different approach more like that adopted in Europe but concluded that a wholesale revision of this kind would be too disruptive. Within the framework of the present system, however, much more could be done to make it more flexible.

We accept this general conclusion. We have already adopted one of the major recommendations of the Green Paper by providing in the Competition Act a flexible means of investigating restrictions of competition falling outside the scope of the Restrictive Trade Practices Act. We are continuing to study the other proposals of the Green Paper with a view to finding practical and unbureaucratic ways of making the system more flexible.

The Green Paper also recommended firmer action to prevent evasion and ensure to the economy the full potential benefits of the legislation. We are looking at the possibilities. An important specific recommendation was that collusive tendering, which exploits the customer and the taxpayer, should be prohibited outright. My Department has just issued a consultative document following up this proposal in greater detail.

I turn now to the question of monopolies and mergers policy, which was considered in the first Green Paper. This raised complex issues of economic and industrial analysis, and what I say now will inevitably be somewhat oversimplified.

The Green Paper contained a valuable analysis of the economic issues underlying monopolies and mergers policy. The central issue is the role of industrial structure in economic performance and behaviour. There are no clearcut answers to the questions raised in this field, and even the basic facts of the case are difficult to establish. But there seems to be evidence that our economy is unusually concentrated into large firms and that dynamic smaller firms play less of a role than in many other countries. Concentration has come about to a great extent through mergers rather than through internally generated growth. The results of these mergers are difficult to assess, but at least there is little evidence that they have been generally beneficial to efficiency.

These findings are bound to give us food for thought. Has our industry become too concentrated? Is there room for independent sources of innovation and enterprise to emerge? How can we make industry flexible enough to respond to the changing needs of the world market?

My right hon. Friend the Secretary of State last month issued a substantial policy statement on this subject, to which I must refer hon. Members for a fuller explanation of our position. We have drawn two major policy conclusions from the evidence. First, we must do all we can to remove obstacles such as taxation penalties to the restructuring of industry in less concentrated units. We have announced important changes to tax and company law for this purpose. Secondly, we must all—and here I mean industry, as well as the Government—be duly sceptical about the idea that greater concentration through mergers will automatically bring greater efficiency. The case for any merger should be examined most carefully, and the Government, through their competition institutions, have a responsibility to look closely at mergers that seem likely to restrict competition.

We believe that this shift towards a more sceptical approach can be accommodated within the flexible framework of the existing legislation. We have, therefore, decided not to make substantial changes in the law for the time being. We do not want to tinker with a well-established system just for the sake of doing so. Naturally, we have seriously considered the specific proposals of the Green Paper. Broadly, these suggested a rather more detailed framework of criteria for the assessment of the effects of mergers on competition, and to some extent they would build in a presumption that an increase in concentration was undesirable.

We do not think that we can be dogmatic on these matters. Each case is unique, and we are sceptical of the value of hard-and-fast guidelines. Before we could consider substantial changes to the legislation, we believe that the full scope of the existing legislation should be explored.

Because of the time factor in this debate, I cannot reply in greater detail, but I shall be writing to my hon. Friend about the more specific matters that he raised in this connection.

My hon. Friend asked whether full use was being made of the Monopolies and Mergers Commission. I must say straight away that I have nothing but praise for the vigour and effectiveness with which the Commission has tackled the problem of speeding up its work in the last year. It has been given major and demanding new functions under the Competition Act, which have already begun with our programme of references in the public sector. Indeed, even in advance of this the commission completed within six months a substantial investigation into the efficiency of London postal services and produced an excellent report. At the same time, it has continued with a full programme of monopoly references—

It being half-past Two o'clock, the motion for the Adjournment of the House lapsed, without Question put.