Competition policy and economic growth: principles and practice
Speech: 'A UK perspective'.
I am most grateful for this opportunity to address this important conference on competition policy and economic growth here at Chatham House, and for allowing me the final slot. The event and the topic is particularly timely when many countries, especially in Europe and North America, face the policy challenge of restoring economic growth; while here in the United Kingdom, we are engaged in establishing a new competition regime and a new Competition and Markets Authority (CMA) with new powers and duties. The UK government has undertaken this reform because it wishes to strengthen the effectiveness of the competition regime, and thereby strengthen enhance economic performance. This afternoon I would like to talk about how we are going about creating a single, more powerful voice for competition and markets, influential both in the UK and abroad, how the UK regime is changing as a consequence of the new legislation, and also to comment on the general theme of the conference, namely the links of competition policy to economic growth.
Before that, I would like to congratulate organisers for yet another successful event. Today marks the 10th anniversary of the Chatham House Competition Conference. I know that those who have attended it in previous years have always appreciated the opportunity it gives them to take time out from their day-to-day responsibilities and think more broadly about the issues and how this might influence their approach to their work. Indeed, it has been particularly useful for me as a new boy in the competition world to meet colleagues from around the world and to debate the issues around institutional design and the common challenges we face.
My Chief Executive, Alex Chisholm, and I are very much engaged with the challenges and processes around the creation of the new Competition and Markets Authority. Although our precise mission statement remains a work in progress, we already have a clear sense of purpose. The new Act gives us a primary duty to:
- seek to promote competition, both within and outside the United Kingdom, for the benefit of consumers”
Note, importantly, the international dimension to this primary duty. The Act also requires us to deliver competition outcomes in a more timely way, and the government will be laying out other clear expectations in the form of a strategic steer. The statutorily independent CMA will not be bound by this steer, but must have regard to it.
The two existing authorities, the Competition Commission (CC) and Office of Fair Trading (OFT), are highly regarded and rated internationally as amongst the best in the world, by the Global Competition Review. We want to build on the strengths of the two organisations and add a few genes to create a world-class high-performance organisation which will be more than the sum of its parts. Success will be about relationships as well as process and we aim to be responsive and focused on what matters, making the best use of the wide range of intelligence available to us. Progress is rapid: the Enterprise and Regulatory Reform Act 2013 is now law, the Authority’s Board will be announced quite soon, we are in the process of selecting the senior executive team, we come into legal existence in October, the organisation will come together early next year and we assume our powers in April.
Before moving on to talk more about specifically international aspects and the challenges that are common to competition authorities around the world, I’ll briefly explain some key aspects of the UK’s reforms to the competition regime.
The UK is unusual internationally in the world in operating a concurrent competition regime with a range of sectoral regulators. In the past, the OFT has largely refrained from intervening in these regulated sectors, and has tended to leave the application of competition policy to the sector regulators, with somewhat mixed results. Since these regulated sectors account together for about a quarter of the economy, this really matters, not least to the topic of this conference, economic growth. The 2013 Act now gives the CMA a leading role to promote and coordinate the effective application of competition law in the regulated sectors. It places an explicit duty on all but one of these regulators to consider bringing cases under competition legislation before using their sector-specific powers. The CMA will actively encourage these sector regulators to do so. To assist with this work and building on existing concurrency efforts, we aim to establish a new Sector Regulatory Unit within the CMA and propose a new UK Competition Network with the sector regulators both to enhance strategic dialogue between the heads of the respective bodies as well as at an operational case level
Again, a distinct feature of the UK competition regime is the market investigations regime that enables the CMA to enquire into whether markets are working well to benefit consumers, and where appropriate, devise remedies for problematic markets where no explicit breach of competition law has been pre-identified nor depending on a merger event. This allows us to devise remedies for problematic markets where no explicit breach of competition law has been identified, and without depending on a merger event. These far reaching powers have been, and will be, exercised proportionately. And we must ensure that such investigations do not create excessive burdens in terms of information requests on business. Here our watch words for the use of our powers of investigation are “proportionate” and “well-directed”, “efficient and timely”. As the new legislation requires us to do, we will keep a clear distinction between the two phases of investigation and preserve the system whereby the final decisions to use these remedy powers are taken by independent panellists who had no part in the decision to initiate the case.
On mergers we will continue the work of our predecessors and take a rigorous approach to analysis, to statutory timescales in phase 1, phase 2 and when implementing remedies after phase 2, aim to avoid excessive burdens on parties. Through the new procedure introduced for phase 1, we will be more open about our concerns and thus ensure that merger parties are better placed when offering possible solutions. We will ensure that while we benefit from the synergies of having a unitary competition authority that we continue with having a fresh pair of eyes at phase 2 in merger reference cases.
On cartels, we welcome the reformed offence in the 2013 Act, particularly the removal of the dishonesty test. And we look forward to making the enforcement of the law in this area much more practically effective. Hardcore cartels represent a barrier to dynamic, innovative markets and economic growth, and this change is to be welcomed. I know that there are a number of questions among practitioners about how the new offence and associated defences will work in practice, and the CMA will in due course consult on practical guidance on its approach to prosecution of the cartel offence.
On enforcement our aim is to secure a steady stream of successful enforcement actions and ensure these cases are well chosen, well managed, sufficient in number and variety, and completed with appropriate pace and transparency. We will be working closely with our sector regulator partners and sharing experience and expertise to ensure the effective enforcement of competition law in regulated sectors. Where appropriate, this will include exchanges of staff and collaborative working on cases. I am pleased to say that we have commenced constructive dialogue with our sector regulator partners to build this cooperation through the UK Competition Network.
Over the summer we will be publishing for consultation a significant amount of guidance on the subjects that I have just addressed. This guidance will need to have in place before the launch of the CMA. We have split this into two tranches to be more digestible, so you will see the first consultation phase in July – covering Mergers, Markets, Administrative Penalties, Cost Recovery for Telecoms and Transparency and the second in September – covering Consumer, Competition Act, Cartels, Remedies and Concurrency.
Obviously the competition enforcement work we do will have the interests of consumers at its heart. Competitive markets deliver better outcomes to consumers than uncompetitive ones. But there is more to it than that. Empowered consumers contribute to the competitiveness of markets by driving businesses to compete to deliver better quality goods and services. This in turn increases value for the economy and drive growth and productivity.
At EU-level the OFT has planned, leads and is delivering several projects to enhance international cooperation, working together with other Member States, with funding from the European Commission under the EU Consumer Protection Cooperation Regulation. Current projects include enhancing internet enforcement capability in order to develop a more strategic and long-term approach to e-commerce enforcement and another devising an unfair contract terms strategy. Both projects will be completed early next year.
Under the wider consumer landscape reforms in the UK, the National Trading Standards Board will play a bigger role in the enforcement of consumer law, with the cooperation of the CMA. The Authority will have a range of consumer enforcement powers and primary expertise and responsibility for the enforcement of unfair contract terms legislation, taking responsibility for high profile national cases, such as surcharges that stem from misleading advertising prices, as well as international cases. Mechanisms are now in place to ensure enhanced cooperation between all the bodies involved, which include Trading Standards, Citizens Advice, the Competition and Markets Authority and the new Financial Conduct Authority: sharing intelligence on consumer detriment and allocating enforcement action. This will be a critical area of the new Authority’s work.
Why is all of this important? I think the answer is in the broad theme of this conference: the link between effective competition policy and economic growth. Effective competition creates the incentives and mechanisms by which innovation occurs, productivity increases and firms and markets grow. But in periods of economic slowdown, with falling profitability and weakened cash-flow, the risk is of an increase in anti-competitive practices and forms of consumer detriment. Both the ICN and OECD have made clear statements on this. We must remain resolute and seek to promote effective competition against the pressures for protectionism. Many existing companies under pressure may over-step the mark in their efforts to shore up profitability. Equally consumers and small businesses are experiencing tight budgets, and in some cases real financial hardship, leaving them exposed to exploitative and exclusionary practices.
To soften competition enforcement domestically and internationally would be the wrong direction of travel and would only exacerbate the malaise in the global and national economies rather than cure them. In the most recent authoritative survey of the literature of what determines growth, Chad Syverson identified the four external contributors to the in-firm productivity that drives growth: competition, effective regulation, flexible capital and labour markets, and positive effects from firms clustering together in specific geographic location . Promoting the first two of these drivers - competition and effective regulation have been core to the UK competition regime and will be key going forward. Indeed the rest of the world is converging in that direction too: the fact we now have 127 members of the International Competition Network is testament to how widely the benefits are recognised and persuasive they are. At any rate I think that it is worth quoting the scale of these benefits compiled in a recent World Bank Investment Climate working paper, specifically:
- price drops of 20-40 per cent after international cartels broken up
- employment rates boosted by 2.5-5.0 percentage points by reforms to state controls and barriers to competition
- GDP gains of 2.5% from competition policy reforms in Australia
- consumer savings from cartel enforcement in the US over 8 years of some $1.85 billion.
Similarly, estimates of the effects of the CC’s and OFT’s work suggest some three-quarter of a billion pounds of direct consumer benefits for the financial years 2009/10 and 2008/09 respectively.
It is therefore important that each national competition authority to work together bilaterally and through international organisations in order to identify and expedite the most significant competition and consumer issues that we face and explain why competition and markets matter and what they can achieve when harnessed. (Recall the international dimension to the CMA’s primary duty.) The CMA will therefore build on the UK’s bilateral cooperation initiatives and the work carried out within multilateral fora including the European Competition Network, International Competition Network, and the OECD with respect to the CMA: providing thought leadership; providing technical assistance where practicable; engage in international enforcement as well as benefiting from knowledge about European and international best practice; disseminating this knowledge to competition partner organisations both at home and abroad; and working with other agencies with respect to the advocacy of competition and markets.
As well as active participation in the meetings, tele-seminars and workshops of OCED, ICN, UNCTAD and ECN, the two agencies have engaged in technical assistance. Such assistance takes many forms. For example, in last year the OFT and CC have undertaken technical assistance at: the OECD Hungary Outreach Centre; in Kenya; Pakistan; China and India. They have received secondees from China, Turkey, and Mauritius. And they have addressed many calls for assistance from competition authorities on distinct areas of policy or analysis and hosted many visits to their offices. I expect the CMA to continue with this engagement.
The OFT and CC benefit also from working with such organisations, by discussing the experiences of others and developing best practices. There are two longer term projects of particular interest to the agencies, and to the ICN and OECD. They relate to Evaluation and Co-operation.
Equally, there needs to be cooperation in international enforcement actions. The joint OECD/ICN survey presented at the OECD last February showed an increase in the number of cases where authorities from the member countries had worked together. Between 2007 and 2012, cooperation grew by 30% in unilateral conduct cases, 35% in mergers, and 15% in cartels. We will therefore want to build on the excellent relations and joint working on international investigations by the OFT. This was of course most visible in the Marine Hose case is a very clear example of international cooperation in the competition enforcement arena and, which underlines the close working relationships between the UK competition agencies and other competition enforcement agencies, most notably the European Commission and US Department of Justice, together with agencies from Japan and Australia. In summary, the CMA will continue to work closely with its international counterparts.
Such international activity not only minimises the potential burden of uncoordinated enforcement, there are clear benefits for British business and consumers including rectifying cross-border challenges such as creating a level-laying field through the establishment of a consistent and stable system of international rules to govern antitrust and mergers.
To conclude, this conference has addressed today many issues critical to competition policy and its applicability to economic growth that are relevant not only to the UK but globally. I have outlined to you the UK’s contribution to this process and the reasons for establishing a new competition regime and a new, unitary Competition and Markets Authority. I hope I have also given you a sense of how we intend to go about this task and what is involved, particularly in ensuring that we build on the sound foundations of existing institutions in order that we contribute to the working of more effective and efficient markets both at home and abroad, and therefore to economic growth. I look forward to working with many of you in months and years to come. Thank you.