Clause 21 — Duty To Make References In Relation To Completed Mergers

Orders of the Day — Enterprise Bill – in the House of Commons at 6:30 pm on 30th October 2002.

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Lords amendment: No. 18 in page 11, line 19, leave out paragraph (e) and insert—

X(e) the European Commission is considering a request made, in relation to the matter concerned, by the United Kingdom (whether alone or with others) under article 22(3) of the European Merger Regulations, is proceeding with the matter in pursuance of such a request or has dealt with the matter in pursuance of such a request."

Photo of Miss Melanie Johnson Miss Melanie Johnson Parliamentary Under-Secretary, Department of Trade and Industry

I beg to move, That this House
agrees with the Lords in the said amendment.

Photo of Alan Haselhurst Alan Haselhurst Deputy Speaker and Chairman of Ways and Means

With this we may discuss Lords amendments Nos. 21, 22, 24, 28, 34, 53, amendments (a) and (b) thereto, 54, amendments (a) to (c) thereto, 65, 66, 78, 81, 82, 84, 88 to 90, 116, 117, 136 to 142 and 211.

Photo of Miss Melanie Johnson Miss Melanie Johnson Parliamentary Under-Secretary, Department of Trade and Industry

This group of amendments covers issues relating to the interaction between domestic regimes and European competition law. In particular, we have introduced amendments to clarify and improve the relationship in four areas. We have sought, first, to highlight the primacy of EC competition law where it applies and, secondly, to clarify the domestic duty to reflect that. The third point is the need to ensure that the Secretary of State can act to protect legitimate interests in cases that fall to the EC merger regime for assessment of the competition aspects. The fourth and final area is the minor changes to the power to take account of modernisation. They are sensible amendments to ensure that the new domestic regime is a good fit with EC competition law.

The Government intend to resist the amendments to Lords amendment No. 53, and I shall take your advice, Mr. Deputy Speaker, on whether I can do that. However, my hon. Friend Mr. Barnes will no doubt wish to speak to his amendments.

Photo of Mr Harry Barnes Mr Harry Barnes Labour, North East Derbyshire

I wish to speak to amendments (a) and (b) to Lords amendment No. 53, and to amendments (a), (b) and (c) to Lords amendment No. 54.

This is the fourth attempt that has been made in the two Houses to try to insert into the Bill serious provisions relating to the public interest that are in line with those in section 84 of the Fair Trading Act 1973. Under the current legislation, it is possible in theory for the Secretary of State or the Director General of the Office of Fair Trading to refer to the Competition Commission a merger that might seriously affect the public interest. In the 1973 Act, the public interest is described as relating to the balance of industry and employment throughout the United Kingdom and to a consideration of the ability of UK producers to compete in export markets. If those markets are harmed or damaged, the Competition Commission can consider a merger.

Unfortunately, since the time that Lord Tebbit was a Member of the House, the policy of Governments of both persuasions has been not to make great use of that power. It is not true to say that it has never been used, but it has been difficult to persuade Governments to act. Ideally, I would like moves to be made so that action is obligatory while retaining as much as possible of the 1973 provision. I have pursued that aim on several occasions in the House.There is much concern in the trade union movement about this matter, and the general secretary of the Trades Union Congress and most of the major trade unions have made representations to the Secretary of State. I elaborated on that in our earlier debates on this issue.

The Bill restricts public interest considerations to defence matters and contains a longstop provision, which means that the public interest can be referred to. However, the Government have never defined what that means or clarified the circumstances in which the provision could be used. The Conservatives tend to fear the Government's provision, believing that a horse and cart could be driven through it. However, I see the Government's approach as something of which we know not what. It is unlikely to be used in any feasible circumstances, so it is likely to be a fairly insignificant power. We therefore need a much stronger provision for the public interest to be introduced.

We first discussed the matter in Standing Committee. The probing amendments that I tabled were based on the experience in my constituency of the takeover of Biwaters by Saint-Gobain, which resulted in the immediate loss of 700 jobs. In terms of employment, the distribution of industry, export markets and viability, Biwaters was in a good position. What happened was a disgrace. We should have activated and made use of the 1973 measure.

I forced a vote on the issue on Report, as reflected at columns 1094–95 of Hansard on 13 June, when I managed to muster 39 in support of the measure. Some 245 hon. Members voted against it. I do not imagine that the Government are going to have a change of heart and make a concession, so I intend to divide the House on my amendments. The vote on 13 June was the only hostile vote by Labour Members because the Bill contains many acceptable provisions. Indeed, there has been little hassle throughout its proceedings. The Bill is lengthy. It has been greatly debated and many amendments have been tabled, but there has not been a raft of votes or heated discussions. Opposition Members have in general been happy with the Bill. They view it as a way to produce a dynamic economy, and that part of new Labour ideology appeals to some of them.

A third attempt was made to introduce public interest measures. When the Lords discussed the Bill in Committee, probing amendments were tabled by Baroness Turner, supported by Lord Hoyle. My amendments have a different framework and context.

Photo of Andrew Robathan Andrew Robathan Shadow Spokesperson (Trade and Industry)

I just want to clarify one thing. Although we may not object to everything, we are not entirely happy with the Bill. However, much of it is sensible.

Photo of Mr Harry Barnes Mr Harry Barnes Labour, North East Derbyshire

I realise that many people in the City and elsewhere will be happy with many of the measures. However, other people are attracted to different aspects of it, such as consumer rights, which we wanted to extend to worker rights, and bankruptcy. Had things been different, the 11 Clay Cross councillors, some of whom still represent people in my constituency, might have faced a different system.

The scope of our debate is reduced to matters associated with the European Union and clawing back powers. In addition, the definition of public interest is a bit restrictive because it refers to the distribution of employment and industry. It is drafted in that way because of the possibility that it would be debated and can be discussed only in the context of amendments Nos. 53 and 54.

We are restricted to European merger laws. They relate to mergers of a certain scale and to a community dimension, which in turn relates to a complex threshold provision. They are handled exclusively by the European Commission rather than national competition authorities. However, European law allows national competition authorities to request the Commission to consider a merger on a number of grounds including defence interests, mergers that primarily affect the member state and cases in which a member state needs to take action to protect its legitimate interests. The amendments would instigate and extend public interest concerns.

The subject was elaborated on and discussed in the Lords. Lord Sainsbury explained that the intention of the amendments tabled there was

Xto preserve the current position, which is that, where necessary, the UK can use the domestic merger control regime to take action on matters other than competition, such as defence, in relation to cases that fall to" the economic community merger regulations. He went on:

XIt is important to note, however, that the power to protect legitimate interests will not range any wider than the public interest considerations that may be taken into account under the new UK merger regime."—[Hansard, House of Lords, 15 October 2002; Vol. 639, c. 789.]

My intention is not in line with that. I want to widen the scope, even though the extent to which I can do that under the procedures of the House is limited.

I feel strongly about the matter, especially in light of the Biwaters experience and ensuing developments. It seemed that the Government were ready to get rid of the public interest concern as it related to mergers. The House needs another chance to express its views on that so that a residual part of the public interest remains.

Photo of Vincent Cable Vincent Cable Shadow Spokesperson (Trade and Industry), Liberal Democrat Spokesperson (Trade and Industry) 6:45 pm, 30th October 2002

I admire the hon. Gentleman's persistence and stamina. I have supported him because he has a case, although my point of departure is different from his. The existing system, which allows Ministers to make final decisions on mergers, has considerable disadvantages. That is why the Bill gets rid of it. The problem with the system is that it leads to capricious political intervention, but it does have some advantages. Ministers are ultimately accountable and can act in a wider public interest. There will be times, such as the impact of a merger on a geographical area, when that would be useful. The hon. Gentleman is right that it is desirable to have the principle of a backstop provision.

Photo of Mr Harry Barnes Mr Harry Barnes Labour, North East Derbyshire

There is no arrangement by which the Director General of the Office of Fair Trading can use the public interest argument when referring a case to the Competition Commission. We should consider whether that power should fall to the Secretary of State or the director, or a combination of the two.

Photo of Vincent Cable Vincent Cable Shadow Spokesperson (Trade and Industry), Liberal Democrat Spokesperson (Trade and Industry)

The hon. Gentleman suggests options, but we are arguing about the principle.

Photo of John Redwood John Redwood Conservative, Wokingham

The hon. Gentleman said that ministerial decisions can be capricious. As a Minister who was involved in making competition decisions, I hasten to put it on the record that they were never capricious. Had they been capricious, they would have been subject to judicial review and legal proceedings. There are rightly strict controls on how Ministers make such decisions and on how they have to be promulgated and explained. The hon. Gentleman should reflect again. There can never be a capricious ministerial decision unless it is one that is overturned.

Photo of Vincent Cable Vincent Cable Shadow Spokesperson (Trade and Industry), Liberal Democrat Spokesperson (Trade and Industry)

The right hon. Gentleman may be playing with words. He is describing the procedure correctly, but Ministers have in the past made decisions on mergers policy that do not appear to have been inspired by competition policy or the public interest. That is why the Bill was introduced and why it has the support of all parties.

Mr. Barnes has made his presentation on several occasions. I am not sure that we would be well served by having another Division on the matter, but if the hon. Gentleman wants to press it to a vote, I will support him.

Photo of John Martin McDonnell John Martin McDonnell Labour, Hayes and Harlington

The debate on public interest and public security, as defined by the European merger regulations, has been extensive but not particularly clear. It would be helpful for future interpretation of the law if the Minister stated on record whether, under those regulations, the definitions of public interest and public security take any account of the distribution of industry and employment. Are rates of employment and unemployment in an area a consideration in determining public interest or public security? Can the Minister give examples in which those factors would be taken into account?

Photo of John Redwood John Redwood Conservative, Wokingham

I hope, Mr. Deputy Speaker, that if the Minister catches your eye, she will comment a little more on the main purpose of these amendments and on the relation between UK and European Union law.

When the Bill that became the Competition Act 1998 was before the House, we were assured that it would be the final statement on the necessary division between EU law and UK law. We were told that it would implement a new system that would ensure that we were not at variance with Brussels and that we had separated powers correctly. We are now told by Ministers that the Act is far from perfect and that we must pass voluminous legislation to get it right, even though EU competition law has not changed very much. The main definitions for that law were set out in the merger regulations and other important texts that have not changed in the intervening period.

Will the Minister explain why errors were made and why she feels that the Government have now got it right? Is she prepared to say that this is a definitive version of the relative powers of the EU and the UK in this field, barring, of course, further change because of a development in the superior law of the EU? I was pleased to hear the Minister admit that EU law in this field is superior—and that that is reflected in the Bill—because I have long believed and argued that, and I have encountered resistance from those who want to pretend that the EU is less powerful than it is. That was an important statement by the Minister.

Photo of Jonathan Djanogly Jonathan Djanogly Conservative, Huntingdon

I point out, in support of my right hon. Friend, that it was repeatedly said in Committee that the previous legislation is so recent that we have not had time to assess its implications and how it works in practice.

Photo of John Redwood John Redwood Conservative, Wokingham

My hon. Friend has made the powerful point that such complicated legislation, with many regulations, takes a long time to bed down. It takes time to establish the case law by which we see how legislation is working, so the Government, figuratively speaking, have pulled up the plant to see whether it is growing, which is not a good way of practising horticulture. I am worried that they may do that again because of the enormous complexity of this Bill. They lack a sureness of touch because they are trying to marry their political wish to tell the British people that Europe has very little power and is not taking strong legal powers beyond those of the nation states in their desire to align themselves with the obviously strong powers held by the Brussels regime in this and many other areas.

Will the Minister reassure the House that she is aware of the current negotiations for a constitution for Europe? That is important work, and drafts have been in circulation. Can she assure the House that nothing in those drafts clarifying the relative powers of the Union and the member states will mean that she, or her successor, has to return to the House within a couple of years to legislate yet again? One worries that, as the Government fumble for a solution, this will become a perpetual round of legislating, revising and amending. That would mean that all those in the business community who are desperate for certainty about the law, about who applies it and about who has power would constantly have to go to expensive lawyers for interpretations of lengthy new legislation.

I have declared my interest in the register, and I do not speak on behalf of business, but that community is increasingly befuddled by the length and complexity of legislation and the constant changes to it. It is beginning to feel that the Government change the law rather more often than does the EU, although they claim that in some way the EU requires those frequent changes.

Will the Minister reassure us that she has taken account of all the best legal advice about the current position, and that it is now definitive? Secondly, will she reassure us that nothing doing the rounds in Brussels or elsewhere in the EU is likely to make a material change? Thirdly, will she confirm that there is nothing in the preliminary drafts for the European constitution that will require us to revise the Bill? Fourthly, does she think that there can now be a period of greater certainty and clarity to allow our competition regime to bed down for years and give us a good chance to see how it works?

Photo of Mark Field Mark Field Conservative, Cities of London and Westminster

I support the words of my right hon. Friend Mr. Redwood, and I think that the issue of certainty is central to the debate about the relationship between the EU legal regime on competition and that in the UK. My right hon. Friend rightly addressed the demand from business for more certainty. It is certainly odd that legislation passed as recently as 1998 is now being updated when it has not had an opportunity to bed down.

My concern, however, goes further, and I am interested to hear the Minister's response. There seems to be confused thinking about the role of competition policy. Indeed, it has to be said that, whatever one thinks of EU competition policy, it is fairly certain, and it has a test—the dominant position test. One of the concerns addressed in Committee and in the Lords is that the theory underlying the Government's introduction of the Bill, which will presumably be an Act before long, is that it will bring in a Xsubstantial lessening of competition" test. It strikes me that, notwithstanding the Minister's reassurance a few moments ago, there is a risk that if we are not careful we will fall foul of EU legislation and, as a result, our businesses will fall foul of the European court. I reiterate the point that we must have give the situation proper consideration and take full legal advice. The Minister reassured us that the Bill will be part and parcel of the EU process, but I can imagine that changing, particularly as we now seem to be diverging from the dominant position test.

I turn briefly to the contribution of Mr. Barnes and that of my old sparring partner, John McDonnell. I am sure that he is aware that only yesterday the Lords finally gave the City of London (Ward Elections) Bill its Third Reading. However, I am concerned that in his desire to get a balanced distribution of industry and employment in his amendment, the hon. Member for North-East Derbyshire presumes that the trade unions are acting in the public interest. I do not believe that that is the case. The trade unions act, rightly, in their members' interests, but the idea that those interests and the public interest are one and the same is naive. I do not favour more Government control.

Photo of Mr Harry Barnes Mr Harry Barnes Labour, North East Derbyshire 7:00 pm, 30th October 2002

Of course, a substantial part of the Enterprise Bill covers consumers, who have their own individual concerns and legitimate interests. The hon. Gentleman may remember that I attempted to table another batch of amendments arguing that workers organisations should have such representation, which is not to say that they do not have sectional and selfish interests as well. However, they also have legitimate interests, which sometimes produce a fruitful result.

Photo of Mark Field Mark Field Conservative, Cities of London and Westminster

The hon. Gentleman will forgive me if I cannot remember all his contributions. I am sure that, like me, he is befuddled by a number of matters that have come before the House. The Bill has not only completed its Report stage but has come back before the House today. However, I accept his point that collective interests are at stake, including consumer matters which, no doubt, we will discuss later, even if only in outline.

Opposition Members are concerned that large consumer bodies will play a more important role in the Bill's operation than their status necessarily dictates. They are not unaccountable, but should be regarded as a party with particular interests that do not necessarily amount to the public interest. I shall be interested in the Minister's response, but I am concerned that the amendments are proposing more Government control. It would be unwise to second-guess markets, as that served the country badly in the 1960s and 70s. If that were introduced in the Bill, there would be no great advantages, either for enterprise or the business community as a whole.

Photo of Miss Melanie Johnson Miss Melanie Johnson Parliamentary Under-Secretary, Department of Trade and Industry

May I respond first to the amendments tabled by my hon. Friend Mr. Barnes? I recognise that he has spent a considerable time trying to convince the Government of the wisdom of his case. Like Dr. Cable, I admire his stamina and efforts.

The amendments to Lords amendments Nos. 53 and 54 seek to enable the Secretary of State to intervene and act to protect matters relating to

Xthe legitimate interests of the balanced distribution of industry and employment" in cases that fall to the European Community merger regulation—the ECMR. I am not sure that the line numbers are accurate, but I think that that is the sense of my hon. Friend's proposals. We have previously debated in the House amendments that sought to introduce the consideration of matters such as employment in cases handled under the domestic regime. I shall not repeat in detail why the Government believe such changes are undesirable, although I agree with my hon. Friend that those matters are important. The Government believe that vigorous competition is the key to ensuring that United Kingdom businesses are better able to provide long-term and sustainable employment. Our record of creating more than 1.5 million new jobs since 1997 is proof of the success of our strategy.

The domestic regime that we have proposed ensures that competition is the key consideration—we have made it clear that that should be the focus of future merger inquiries. The European regime already operates along those lines. Under the ECMR, the European Commission looks solely at the competition aspects of the merger. Only in a very few cases is it necessary for member states to act in parallel to address non-competition concerns. We have proposed that the grounds on which the Secretary of State acts in ECMR cases should be no wider than those in which she may act in domestic cases. It seems sensible, therefore, to link the European intervention power to the considerations specified in clause 57. However, we also need to be aware of the impact of European law in ECMR cases. The ECMR provides that the grounds on which member states can act is limited to those specified as legitimate interests or recognised as such by a decision of the Commission. The grounds suggested by my hon. Friend are neither specified nor the subject of a Commission decision, so the amendments would have no effect in law. For those reasons, I urge him to withdraw his amendments, although I respect the fact that he has said that he may wish to press them to a vote.

Turning to the remarks of Mr. Redwood, the Competition Act 1998 and the Bill deal with different matters. The Competition Act deals with the introduction of prohibitions on anti-competitive agreements and abuses of the dominant position. The Bill is mainly about the reform of the merger and monopoly regimes, which were not touched by the Competition Act. The Bill completes the process of reform. We have also taken sensible steps to provide for future changes in Europe by providing for a power to deal with EC modernisation issues, although I emphasise the fact that the amendments are minor in relation to such matters. I hope that that clarifies my point that the Bill is a complementary exercise which completes the process begun by the Competition Act. Indeed, it also completes the reform of competition legislation and the competition regime in the UK, which lay untouched for several decades before the Government came to power in 1997.

Photo of John Redwood John Redwood Conservative, Wokingham

Is the Minister assuring the House that the Bill completes the reform process so that we are completely compatible with European Union law? We would therefore need only to make changes in future if there were a big upheaval in EU law. Will she also confirm that no such upheaval is planned in the current discussions on the constitution and other matters?

Photo of Miss Melanie Johnson Miss Melanie Johnson Parliamentary Under-Secretary, Department of Trade and Industry

The right hon. Gentleman knows full well that it would be foolish of me to respond to his quest for assurances. We are doing our best to ensure that we do not have to make significant changes in future. I doubt whether he had a crystal ball when he was in government, and I do not have one either. The provisions are as future-proof as possible in relation, for example, to the changes mentioned by Mr. Field. We are discussing the future of the dominance test with the Commission and have moved towards a substantial lessening of competition. We would like the European authorities to do the same, but if they do not, that does not pose any difficulties for us. However, that is one of the main areas of discussion on competition law. I therefore hope that the right hon. Member for Wokingham accepts my assurances.

Lords amendment agreed to.

Lords amendment: No. 19, page 11, line 43, after Xof" insert

Xa notice or possible notice under section 41(2) or 58(2) or"

Photo of Miss Melanie Johnson Miss Melanie Johnson Parliamentary Under-Secretary, Department of Trade and Industry

I beg to move, That this House
agrees with the Lords in the said amendment.

Photo of Alan Haselhurst Alan Haselhurst Deputy Speaker and Chairman of Ways and Means

With this we may discuss Lords amendment No. 20 and Government amendment (a) thereto, and Lords amendments Nos. 23, 25 to 27, 29 to 33, 35 to 52, 55 to 64, 67 to 73, 75 to 77, 79, 80, 83, 85 to 87, 91 to 115, 118 to 123, 125 to 131 and 212 to 225.

Photo of Miss Melanie Johnson Miss Melanie Johnson Parliamentary Under-Secretary, Department of Trade and Industry

I shall speak to this group of merger and market amendments in two parts. First, I shall deal with the turnover threshold, and then I shall speak to themany technical amendments that constitute the remainder of the group.

On the turnover threshold, we agree with the Lords that clause 22 should be amended. We believe that Lords amendment No. 20, which replaced the #45 million threshold for mergers with one of #100 million, should itself be amended by amendment (a), which inserts one of #70 million.

The turnover threshold is one of two jurisdictional tests that make a merger eligible for investigation by the Office of Fair Trading. The other test is whether a merger would create or enhance a 25 per cent. share of supply. It is important to emphasise at the outset that these are eligibility thresholds only. If a merger involves the acquisition of a business with a UK turnover above the relevant threshold, the OFT is entitled to inquire into it. It does not mean that the merger will be referred or blocked but simply that the OFT can consider whether the merger raises sufficient competition concerns to justify a reference. The great majority of qualifying mergers are not subject to any further action by the competition authorities, but it is important that they can be assessed.

The purpose of thresholds is to strike a balance between excessive and necessary regulation. They should be aimed at ensuring that mergers of real concern can be examined, but avoid interference with cases of no material competition concern. Getting the level right is necessarily a matter of judgment.

The Bill replaces the current assets-based jurisdictional threshold with a turnover threshold. It is widely agreed that turnover is a better indication of the economic significance of a merger. The issue is at what level the new threshold should be set. Our goal in selecting the level of the turnover test has always been to bring within the scope of the merger regime broadly the same number of companies as currently qualify under the assets test. To get this right will inevitably take experience.

Our research indicated that a #45 million level would represent neither a tightening nor a loosening of the domestic merger control regime. In the context of a Bill that has as one of its primary aims the safeguarding of competition, we think that it would be odd to be thinking in terms of any significant relaxation of the scope of the regime. Anti-competitive mergers can do serious harm to the interests of consumers and to the economy at large. Avoiding that is the whole point of merger control and it should not be overlooked.

Amending the threshold to #100 million, as the Lords propose, runs a serious risk of allowing anti-competitive mergers to proceed without any form of scrutiny by the competition authorities. The OFT has estimated that about 50 per cent. of the mergers that can currently be scrutinised would no longer be eligible for any form of investigation. Far greater reliance would have to be placed on the alternative share of supply test. That would go against the grain of experience to date. At present a big majority of mergers that qualify for investigation qualify under the assets test. It also goes against the grain of international notification regimes, which are invariably based on turnover thresholds.

The share of supply test can be useful in the context of horizontal mergers, but it is more complex and cannot be used to bring vertical mergers within the scope of the regime. For example, a merger that was scrutinised last year, the Dynergy/BG Storage merger, would not have qualified under a #100 million turnover threshold, or under the share of supply test. The merger could have affected domestic gas prices and is therefore the sort of case that we would want investigated.

With a very high turnover threshold, we risk missing mergers of small but potentially significant companies with lower market shares, such as IT or biotech companies, which none the less represent a significant threat to established firms. It is because of such examples that the Competition Commission has expressed serious concerns about the impact that a turnover threshold of #100 million might have.

We recognise, however, that the threshold figure is an issue around which there are strong feelings. We have no desire to increase unnecessary regulation in this area, or in any other. We have also noted that the assets threshold of #70 million has not been adjusted since 1994. A review of that figure might have been appropriate before long. We recognise that estimating the practical impact of the new turnover threshold is necessarily an imperfect science, and that it would be unfortunate if we had unintentionally caught too many cases. In the light of pressures for a higher figure, we therefore propose amending the Lords amendment so that the turnover threshold is initially set at #70 million.

We offer this raised threshold amendment with some unease. If it proved subsequently that a significant number of harmful anti-competitive mergers were escaping scrutiny altogether, the Government would have no choice but to reduce the threshold to an appropriate level. We will need to keep the matter under review. I hope that the #70 million threshold will be acceptable to the House.

Photo of Jonathan Djanogly Jonathan Djanogly Conservative, Huntingdon 7:15 pm, 30th October 2002

In the same way as the Government intend to keep the matter under review with a view to moving the figure downwards, does the Minister accept that it may be more appropriate to move the figure upwards? Will the Government keep an open mind about what the appropriate figure should be after the Bill is enacted?

Photo of Miss Melanie Johnson Miss Melanie Johnson Parliamentary Under-Secretary, Department of Trade and Industry

Yes, indeed. We will keep an open mind. The entire discussion is about the methodology of achieving in turnover terms the same effect as the asset threshold had before. We want neither to relax the regime nor to tighten it. We need to achieve equivalence; the question is which figure would achieve that. All our research suggested #45 million, but we have not managed to convince others of that, so we are suggesting moving to #70 million. There is a clear indication that were we to move to #100 million, there would be a significant relaxation of the merger control regime, which would be highly undesirable, as I am sure the hon. Gentleman would agree. That is why we have arrived at the #70 million figure.

Photo of Miss Melanie Johnson Miss Melanie Johnson Parliamentary Under-Secretary, Department of Trade and Industry

The hon. Gentleman shakes his head in a worrying way, but does not wish to elaborate.

The remaining amendments in the group are all primarily technical changes to the Bill to improve its functioning. They reflect work that has been done in the other place to respond to points raised by noble Lords and to check the Bill for accuracy. Unless hon. Members wish me to go through any of the amendments in detail, I do not propose to do so at this point.

Photo of Andrew Robathan Andrew Robathan Shadow Spokesperson (Trade and Industry)

It is unfortunate that on such an extraordinarily important and complex issue, which has taken up a great deal of the time of both Houses, with the exception of Mr. Barnes and his supporter, John McDonnell, no hon. Member has been willing to speak in support of the Government.

Photo of John Martin McDonnell John Martin McDonnell Labour, Hayes and Harlington

I was not supporting the Government.

Photo of Andrew Robathan Andrew Robathan Shadow Spokesperson (Trade and Industry)

I apologise to the hon. Gentleman for suggesting that he was supporting his Front-Bench colleagues. [Interruption.] I know that he has a reputation to protect. I meant that it is a pity that no Government Back Benchers who served on the Committee or others wished to take part in the debate.

On Lords amendment No. 20, the Government have been pragmatic and sensible, and we shall not oppose the change. Of course, we would prefer to stick with a #100 million threshold. None the less, I think that that is a moot point and a matter of judgment, so perhaps the compromise is a happy one. It is possible that the Government's acceptance of a #70 million threshold represents a recognition that turnovers are currently falling, so fewer people might be caught in that threshold as well.

In the House of Lords, the Government committed themselves to reviewing the level within three years of implementation. The Minister has mentioned reviewing. Will there be a rolling review? Does she believe that she could raise the threshold if the provision proves not to work, as my hon. Friend Mr. Djanogly suggested?

Apart from that, I think that we are happy to accept the amendments.

Photo of Vincent Cable Vincent Cable Shadow Spokesperson (Trade and Industry), Liberal Democrat Spokesperson (Trade and Industry)

I shall speak very much in the same spirit as Mr. Robathan.

I accept that the Minister has moved a considerable way towards acknowledging the criticisms about size levelled by the business sector. The worrying aspect of the original discussion was a sense that a number had merely been written on the back of an envelope and that it did not satisfy any scientific tests. I do not know whether the figure is right or wrong, as I am going by the information that I have been given. None the less, I gather that the CBI conducted an extensive survey of UK companies that might come within the Bill's scope in which it cited a ratio of the order of 1.2:1 in describing the relationship between turnover and assets. If that had been applied as an average, the appropriate turnover figure would have been about #85 million. I do not know whether those figures are right or wrong. Clearly, market capitalisation is very volatile and big changes have occurred in the past two years, but that seems a plausible order of magnitude to people in the industry, and I am inclined to accept their judgment.

The key point is that the Government are keeping the matter under review and are committed to the principle of maintaining after the Bill is enacted a number of merger investigations that is roughly equivalent to the number that were conducted previously. I am not entirely clear about when the review will take place. My understanding had been that the Government would reconsider the issue after a year, rather than three years. Perhaps the Minister could clarify that point.

In general, however, I think that the compromise that is being offered is helpful and is a move in the right direction. I am sure that most people in the business sector will accept that the provision is a useful move towards meeting their concerns about over-regulation.

Photo of Jonathan Djanogly Jonathan Djanogly Conservative, Huntingdon

In supporting the comments of my hon. Friend Mr. Robathan, and having examined the debate on these matters that occurred in the other place, I should like to say that there seemed to be some justification for the #100 million figure. However, I was happy to hear the Minister say that an open mind would be kept on the matter and that it would be reviewed.

In introducing the Bill, the Government's clear intention was to help enterprise by inducing a competitive environment and a level playing field. That has been accepted in all parts of the House. On the other hand, at various stages in the Bill's passage, Opposition Members have stated our concern that, rather than helping competition, the Bill borders on restricting the ability of companies to trade and is unnecessarily onerous for directors.

The turnover benchmark key in that context is obviously a very important issue. The merger rules are very complicated. Companies and directors that become involved in any sort of investigation must contend with enormously significant costs and a massive amount of time will be taken from them in running their businesses. There is always a fear in respect of such legislation that the OFT and the Serious Fraud Office, which will now get the same powers, will embark on fishing expeditions.

After the Committee proceedings, the Minister should know that, having spoken to a competition legal practitioner, my understanding is that the OFT has recently changed its procedure. The OFT is not only investigating companies, but putting in place a new procedure in which it asks companies to conduct its investigations on its behalf. It will basically send the companies lists of matters for investigation and ask them to come up with the goods. That is a serious development. Instead of having a certain amount of costs carried by the OFT, companies will now have to cover those costs themselves. In other words, they will have to employ professionals to do the OFT's work. Such concerns are very serious and are becoming more so.

The turnover threshold is extremely important in that context. The concern is that, if we do not get the level right, it could stunt the growth of some of our fastest growing companies. We should want to encourage those companies, instead of restricting them with unnecessary regulation and cost. Obviously, stopping their growth will be bad for the economy overall.

While I certainly appreciate that the #70 million figure is better than the original one, companies and practitioners have communicated genuine concerns to me. I therefore hope that the Minister and the Government will keep to what they have said about reviewing the figure carefully and seeing how it works in practice.

Photo of John Redwood John Redwood Conservative, Wokingham

I usually speak as a hawkish person on competition matters. I think that it is most important that the regulator and the Government are vigilant in ensuring that no market is damaged by any company having unreasonable market power. That is especially important when mergers or acquisitions are being planned.

I accept that it is possible for a company to seek dominance in a local area or region in the United Kingdom and that that might give the authorities reason to investigate mergers with relatively small turnovers. However, we should remember the context of the United Kingdom economy, which is the fourth largest economy in the world and is exposed to an enormous amount of overseas trading and huge competition from the five continents of the world. We are now talking about an economy with more than #1 trillion in national turnover. Therefore, even a business concern with a turnover of #100 million would represent 0.01 per cent. of total national income. If such a business were a national one, it would be unlikely to have a strong position unless it operated in a tiny marketplace, as in most of the larger marketplaces such turnover figures would be unlikely to attract the attention of the authorities.

Photo of Jonathan Djanogly Jonathan Djanogly Conservative, Huntingdon

I thank my right hon. Friend for giving way. In that context, I think that it is worth mentioning—

Photo of Alan Haselhurst Alan Haselhurst Deputy Speaker and Chairman of Ways and Means

Order. May I tell the hon. Gentleman that it is a good custom to address the Chair?

Photo of Jonathan Djanogly Jonathan Djanogly Conservative, Huntingdon

Thank you, Mr. Deputy Speaker.

It may be worth pointing out to my right hon. Friend that he might want to take into account in his speech the size of the public sector. For instance, it was disclosed to the Trade and Industry Committee only the other day that the public sector now accounts for 40 per cent.—

Photo of Alan Haselhurst Alan Haselhurst Deputy Speaker and Chairman of Ways and Means

Order. I am sorry to have to interrupt the hon. Gentleman a second time, but as I understand it, he is supposed to be making an intervention on his right hon. Friend and not a second speech.

Photo of John Redwood John Redwood Conservative, Wokingham 7:30 pm, 30th October 2002

I get the drift of the comments of my hon. Friend Mr. Djanogly that it is important to understand the public sector context as well as the overall national income figures to which I have referred so far.

The Minister was right to point out that there are two tests. The lower the turnover threshold in the Bill, the more the reliance on the test of 25 per cent. or more of the market. The essence of good judgment will rest on the competition authorities and those contemplating the reference in defining the marketplace. That is always the crucial, difficult issue: is the marketplace all chocolate, specific chocolate bars, or a brand that is so well known that, sui generis, it has 100 per cent. of the market? How do we handle such issues? There have been famous cases over the years, with companies wanting as generous a definition as possible, and consumer groups and others preferring a narrow definition.

Photo of Mark Hoban Mark Hoban Opposition Whip (Commons)

My right hon. Friend makes an important point. Does he know how much time lawyers, accountants and other consultants spend on defining a market? From my experience, even in apparently straightforward matters, such as the supply of paper, the market can be fragmented in many different ways. Definition of the market is therefore so important that the turnover test may not be appropriate.

Photo of John Redwood John Redwood Conservative, Wokingham

I am glad that my hon. Friend agrees that defining the market is crucial. We must examine the turnover threshold in the light of that difficult judgment.

Narrowly defined markets in which dominance is a problem can exist, and one could gain a dominant position in parts of the national market because the services or goods are not easily transported beyond the boundaries of a specific area. In such circumstances, a lowish turnover threshold might be desirable. Therefore I do not approach the figure of #45 million from the position that it is definitely wrong because it is low and that, as a deregulator, I should like it to be higher.

I ask myself the question that the Minister rightly asked: will a turnover threshold of #45 million provide approximately the same as the 1994 #70 million asset threshold, with which I am happy? It has worked well, and the Government must also believe that, because they have not amended it since coming to office and the Minister said that she was trying to reach equivalence when shifting to turnover. I agree with her reasoning. It is right to move to turnover because it is more meaningful than assets when defining a market. After all, turnover affects consumers, whereas the size of the asset base makes little difference to consumers except through the mediation of price. The consumer wants to know how much turnover is being transacted, so turnover is the appropriate test.

I believed that it was implausible for #70 million of assets to correspond with #45 million of turnover. I was therefore interested to hear the remarks of Dr. Cable, who said that CBI research suggested a ratio of 1.2:1. I understand how such a figure could be derived. Earlier, I did some calculations on the back of an envelope and got a figure of at least #70 million for equivalence. If we take #45 million as the figure for turnover, we assume exceedingly profitable businesses to achieve an asset value of #70 million. The current state of most British industry and service sector activities shows that we are nowhere near the profitability that we would need on average to sustain translating #70 million of assets into only #45 million of turnover. A ratio of 1:1 would be required as a minimum; at least #70 million of turnover would be needed to achieve #70 million of assets. Even in that case, one assumes approximately 10 per cent. of turnover. That is an exceedingly good return for all but successful, well protected businesses such as pharmaceutical companies.

The judgment is difficult to make. My first reaction on reading the amendments and the debate in another place was that #100 million was a better round number and closer to what one might calculate to achieve equivalence to the old assets test. However, the Minister and my hon. Friend Mr. Robathan have persuaded me that perhaps we should start with the figure of #70 million and a 1:1 ratio of assets to turnover in the hope that one day, activities will be more profitable and the figure will prove more realistic.

Photo of Andrew Robathan Andrew Robathan Shadow Spokesperson (Trade and Industry)

I want my right hon. Friend to understand that I should prefer a threshold of #100 million. That was the CBI's broad assessment. However, the decision is subjective and perhaps we should not be too dogmatic in resisting the Government's amendment.

Photo of John Redwood John Redwood Conservative, Wokingham

Logic and knowledge of business tell me that #100 million is more sensible from the business point of view.

Photo of Mark Field Mark Field Conservative, Cities of London and Westminster

Perhaps there is some wisdom and method in the Government's madness. Given the state of the economy, a company with a turnover of #100 million this year is likely to have a turnover of #70 million next year.

Photo of John Redwood John Redwood Conservative, Wokingham

That introduces an irreverent political point into a hitherto elegant, non-partisan debate. However, I take my hon. Friend's point: business is not as profitable or successful in the round as one would like.

Although I understand the logic for the figure of #100 million, as a competition hawk, I appreciate the case for starting at #70 million. However, I want to probe the Minister a little more on her interesting point that the Government had been considering that the #70 million asset threshold that was set in 1994 might no longer be appropriate. There were clearly good years in the economy in the mid-1990s, and not all have been overwhelmed or eroded by events since 2000. It would therefore be interesting to know the extent of the Government's thinking about updating the assets test. If they conclude that #70 million is low for the assets test, they must also determine that #70 million is far too low for the turnover test. I cannot be persuaded that anything less than a ratio of 1:1 produces equivalence. I should be intrigued to learn the Minister's view on that important topic.

Photo of Mark Hoban Mark Hoban Opposition Whip (Commons)

We are considering an important issue and I am grateful to my noble Friend Lord Hunt for pressing it in another place. In considering the competition law reform that the Government set in train in their first Parliament and the Minister's earlier comment that she believed that we had reached the end of the process, it is important to examine the threshold for the turnover test and ensure its fitness for today's business environment. The Government have chosen a turnover limit that is the equivalent of the gross asset test under the previous regime. That leads me to question the amount of research that the Government undertook before selecting #70 million as an appropriate turnover threshold.

Lord Hunt's amendment was based on the considerable research that the CBI carried out. It examined 500 companies in different sectors to determine the appropriate threshold for the turnover test. I wonder whether the figure of #70 million was arbitrary and based on the previous test. The Government should consider properly the right amount of turnover in today's business environment. The competition process will be greatly enhanced by a sensible threshold. Although, as the Minister said, many references are not made when a merger is called in under the turnover test, businesses are anxious about a deal being called in.

As I said in an intervention, consultants and others have spent much time examining the structure of a deal to ensure that it does not rise above the threshold. I should hate to believe that the Government are setting a low threshold for the turnover test without considering the costs that businesses will bear by reducing it from #100 million to #70 million.

Photo of Jonathan Djanogly Jonathan Djanogly Conservative, Huntingdon

My hon. Friend makes a very good point, and reminds me of the old adage that turnover is for vanity and profit is for sanity. That has the important implication that, in a tough economic environment such as the one that we have now, the turnover might mean that companies will have less profit and that it would be more important to have a higher turnover figure because of that.

Photo of Mark Hoban Mark Hoban Opposition Whip (Commons)

I am aware of my hon. Friend's commercial background and his understanding of these issues, and he makes an important point. A company could have relatively low profitability, which might suggest that it had a weak market position and low market share, and that it perhaps did not have the opportunity to impact on the competitive environment in which it operates. Simply because its turnover was more than #70 million, however, that application would be called in and looked at by the OFT. It is, therefore, important to ensure that the turnover level is set fairly and appropriately. The Minister referred earlier to the way in which that level could be reviewed. She intimated that it could be reviewed downwards, and my hon. Friend Mr. Djanogly referred to an upwards review.

It would benefit both practitioners and Members of the House if the Minister could comment on the basis on which such an adjustment could take place, and on when she expects that review to happen. What method of consultation would she use to ensure that we set the right level of turnover? How long a period would elapse between the Bill becoming an Act and the review taking place? Clearly, we want to ensure that we have the right answer to this, and we do not want to see too much uncertainty in the market.

Photo of Mark Field Mark Field Conservative, Cities of London and Westminster

Does my hon. Friend agree that, following the CBI's research to which several hon. Members have referred in this small debate, one of the best ways forward might be for the Government to look at the number of companies likely to be encompassed within the confines of such a turnover test? They could then adjust the test on the basis of, for example, the 20,000 or 30,000 companies that would be subject to the provision. In other words, the measure would have an eye to a much more broadly based market, rather than being overly hamstrung by the purely financial terms of turnover.

Photo of Mark Hoban Mark Hoban Opposition Whip (Commons)

I am grateful to my hon. Friend for raising that important point about the number of companies being brought into the provisions of the Bill. My understanding from reading the debates in the other place is that the #45 million level was set with a view to bringing the same number of companies into the net as the #70 million gross asset test would have brought in. I think I see the Minister nodding assent to that explanation, and I am grateful for that. We should not make decisions about thresholds simply on the basis of getting an equivalent number of companies into the net. That would be an inappropriate way of monitoring competition, because we should be looking at the impact of transactions on competition and the market, rather than focusing on the level of turnover.

Photo of Andrew Robathan Andrew Robathan Shadow Spokesperson (Trade and Industry)

Does my hon. Friend share my suspicion that there has been no well-justified or empirical analysis of this threshold? We thought that the original figure of #45 million was plucked out of the air. Let us take a median point and pluck the figure of #70 million out of the air, because that seems better and might satisfy us. To a certain extent it has done so. There has not been sufficient analysis of why we should have the figure of #70 million.

Photo of Mark Hoban Mark Hoban Opposition Whip (Commons)

I am grateful to my hon. Friend for raising that point, because this is one of my principal concerns. I would not say that the #70 million figure has been plucked out of the air, because that would be unfair to the Government. It is, however, a number with which we are familiar from the gross asset test applied under the previous regime. It is important that we use a sensible figure that is based on empirical evidence. That is the basis of the #100 million that the CBI suggested, which was proposed in amendments in the other place and accepted into the Bill there.

I am concerned that the amendment that the Government have tabled is arbitrary in the way in which it sets a threshold for applications to be investigated by the OFT. The Government should be clear that this is only a holding figure. They should reconsider it in the light of experience and empirical evidence, and I hope that the CBI survey that was used to set the figure of #100 million can be used as a basis for the research involved. Will the Minister outline in more detail the mechanisms that the Government expect to have in place when looking at the applicability and appropriateness of the #70 million limit?

Photo of Miss Melanie Johnson Miss Melanie Johnson Parliamentary Under-Secretary, Department of Trade and Industry 7:45 pm, 30th October 2002

I shall endeavour to be brief. Conservative Members have raised broadly the same issues in different guises, and I think that I can be fairly brief in my response.

I shall deal first with the figure set for the turnover threshold. The Competition Commission's estimate of the operation of the #100 million turnover threshold is that there would be 50 per cent. fewer mergers under consideration. It is worth reiterating that figure. In fact, the analysis that the Government carried out was based on the Fame database, which gives details of 1,699,137 companies that filed in 2000–01. That showed that there were 9,966 live companies with assets of #70 million or more. It also showed 7,806 companies with a United Kingdom turnover of #45 million. So, the turnover figure was as close as we could get to that. Only 5,350 companies on the database have a UK turnover of #70 million or more. The figure for companies with a turnover of #100 million was 2,258, compared with the original number of 9,966, based on the assets figure.

Photo of John Redwood John Redwood Conservative, Wokingham

We are talking about a merger, so we have to add one turnover to another. Has the Minister any information on how many of the mergers that have been referred and blocked under the present regime would not have been blocked under either the #70 million or the #100 million turnover figure? That is the more interesting figure for us to know.

Photo of Miss Melanie Johnson Miss Melanie Johnson Parliamentary Under-Secretary, Department of Trade and Industry

The right hon. Gentleman will appreciate that I do not have the whole analysis file here, but very detailed work went on. I hope that I have explained one approach that was made by the Government, and why the figure was picked out as being the best stab that we could make. We shared our findings with the CBI, which undertook further analysis using the different methodology to which other hon. Members have referred. That suggested that it thought that the #100 million figure would be more appropriate, but its approach is based on measuring the average turnover of the companies that happen to meet the assets test, establishing a ratio of that turnover to assets and applying the ratio to the #70 million assets threshold to establish an equivalent turnover threshold. We think that that is an unreliable way of doing it.

Changing the test means that we will inevitably cover a slightly different range of companies. We certainly think that new technology companies whose turnover might significantly exceed their asset base might be covered by the new test for the first time. I return to my original point, with which I am sure all hon. Members agree, that we are seeking to find an equivalent—by moving from the assets test to the turnover test—that captures those companies within the regime for consideration. As I have said, many of the cases are just cleared mergers or investigations that are not taken further. It is important that we look at the same segment in relation to competition issues.

It is also important to note that the turnover threshold relates to the turnover of the target company, to which Mr. Redwood referred. A large company may acquire any company with a turnover up to the threshold without qualifying under this test.

I hope that I have explained why we have got to where we are. We have all agreed that we need to compromise. Clause 27(4) contains a requirement for the Office of Fair Trading to report to the Secretary of State on the appropriateness of the level. I believe that we need to reconsider this matter as time goes on.

Assurances that the Government gave in the other place about the three-year review need to be seen in the light of the original #45 million figure. We have the same interests as Opposition Members and will want to consider how the #70 million figure is emerging to see that it is broadly producing the same playing field for competition merger concerns to be considered as the present regime does, with the improvement of the turnover test. I hope that Opposition Members will support these amendments.

Lords amendment agreed to.

Government amendment to Lords amendment No. 20 agreed to.

Lords amendment No. 20, as amended, agreed to.

Lords amendments Nos. 21 to 52 agreed to.

After Clause 65

Lords amendment: No. 53, insert the following new Clause —

XIntervention to protect legitimate interests

(1) Subsection (2) applies where—

(a) the Secretary of State has reasonable grounds for suspecting that it is or may be the case that—

(i) a relevant merger situation has been created or that arrangements are in progress or in contemplation which, if carried into effect, will result in the creation of a relevant merger situation; and

(ii) a concentration with a Community dimension (within the meaning of the European Merger Regulations), or a part of such a concentration, has thereby arisen or will thereby arise;

(b) a reference which would otherwise be possible under section 21 or 32 is prevented from being made under that section in relation to the relevant merger situation concerned by virtue of Community law or anything done under or in accordance with it; and

(c) the Secretary of State is considering whether to take appropriate measures to protect legitimate interests as permitted by article 21(3) of the European Merger Regulations.

(2) The Secretary of State may give a notice to the OFT (in this section Xa European intervention notice") if he believes that it is or may be the case that one or more than one public interest consideration is relevant to a consideration of the relevant merger situation concerned.

(3) A European intervention notice shall state—

(a) the relevant merger situation concerned;

(b) the public interest consideration or considerations which are, or may be, relevant to a consideration of the relevant merger situation concerned; and

(c) where any public interest consideration concerned is not finalised, the proposed timetable for finalising it.

(4) Where the Secretary of State believes that it is or may be the case that two or more public interest considerations are relevant to a consideration of the relevant merger situation concerned, he may decide not to mention in the intervention notice such of those considerations as he considers appropriate.

(5) No more than one European intervention notice shall be given under subsection (2) in relation to the same relevant merger situation.

(6) Where the Secretary of State has given a European intervention notice mentioning a public interest consideration which, at that time, is not finalised, he shall, as soon as practicable, take such action as is within his power to ensure that it is finalised.

(7) For the purposes of deciding whether a relevant merger situation has been created or whether arrangements are in progress or in contemplation which, if carried into effect, will result in the creation of a relevant merger situation, sections 22 to 31 (read together with section 33) shall apply for the purposes of this section as they do for the purposes of Chapter 1 but subject to subsection (8).

(8) In their application by virtue of subsection (7) sections 22 to 31 shall have effect as if—

(a) references in those sections to the decision-making authority were references to the Secretary of State;

(b) for paragraphs (a) and (b) of section 22(9) there were substituted X, in relation to the giving of a European intervention notice, the time when the notice is given";

(c) the references to the OFT in section 23(2)(a) and (b) included references to the Secretary of State;

(d) sections 24, 30 and 31 were omitted; and

(e) the references in sections 22 to 28 to the making of a reference or a reference were, so far as necessary, references to the giving of a European intervention notice or a European intervention notice.

(9) Section 41(3) shall, in its application to this section and section (Scheme for protecting legitimate interests), have effect as if for the words Xintervention notice" there were substituted XEuropean intervention notice"."

Amendment proposed to the Lords amendment: (a), after Xconsideration", insert—

X, or a matter relating to the legitimate interests of the balanced distribution of industry and employment,".—[Mr. Barnes.]

Question put, That the amendment to the Lords amendment be made:—

The House divided: Ayes 48, Noes 283.

Division number 344 Orders of the Day — Enterprise Bill — Clause 21 — Duty To Make References In Relation To Completed Mergers

Aye: 48 MPs

No: 284 MPs

Ayes: A-Z by last name

Tellers

Nos: A-Z by last name

Tellers

Question accordingly negatived.

Lords amendment agreed to.

Lords amendments Nos. 54 to 131 agreed to.