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    Driving forward competition in the UK economy

  • Posted on September 9, 2016 by

    Competition“Twenty years ago when accountability of public institutions was discussed, the NAO’s name was not mentioned; it is now.” So said a leading expert in competition law, speaking at an NAO Competition Seminar in June to discuss where the competition regime needs to be by 2020. With competition central to the government’s ambitions to improve growth and productivity, and consumers harmed by anti-competitive practices, this seminar was an excellent example of how the NAO’s cross-government role and its influence can truly help to drive public service improvement.

    Effective competition between businesses can lower prices and improve consumer choice, product quality and innovation. Moreover, as the Organisation for Economic Cooperation and Development (OECD) has found, competition also drives productivity growth – and productivity is a key determinant of living standards (see Figure 2 of our Feb. 2016 report, details below). Such benefits are, however, dependent on the competition being effective, and not, for example, leading to perverse market outcomes such as a race to the bottom in terms of quality that harms consumers.
    OECD productivity
    To achieve these benefits, there needs to be public understanding of the role of market regulators; clarity about competition law; bold and resolute enforcement; and effective punishments that encourage business compliance and deter anti-competitive behaviour by firms.

    The benefits and approach are well known; the challenge is in its implementation. In 2010 the NAO reported on significant failings in the UK’s competition regime. Following our report the government decided to merge the Office of Fair Trading and the Competition Commission to create the Competition and Markets Authority (CMA), which began operating in April 2014. Although it’s still relatively early days in the CMA’s operations, we reported in February this year on their progress in improving the operation and oversight of The UK competition regime.

    Our February report found a number of improvements in the oversight of competition, such as strengthened processes that have increased the robustness of the CMA’s legal challenges, an innovative approach to merger control, and greater coordination across the eight regulators through the new UK Competition Network. The CMA did, however, inherit significant challenges in competition enforcement, including a difficult legal environment, low business awareness of competition law and a reputation affected by some high-profile lost cases.

    We made a number of recommendations to help embed the improvements underway and tackle some of the remaining issues. These were accepted by the CMA. Moreover, the CMA and wider UK Competition Network welcomed the NAO’s proposal to get together to discuss the way forward on two of the key issues in our report.

    The result was a seminar on 30 June, hosted by law firm Linklaters. This event is an excellent example of the NAO’s ability, as a neutral organisation working across government, to convene debates on significant areas of public policy and taxpayer interest, bringing together functional experts and practitioners to share experiences and discuss solutions. Other such NAO-facilitated seminars this year have focused on issues ranging from best practice in cost forecasting, achieving value for money from public service markets, to improving the capability of the government’s commercial profession; in each case the participants have been enthusiastic to engage in the discussion and share their perspectives.

    The June seminar followed up two particular aspects highlighted in our report: firstly, the need for the CMA to improve its competition enforcement including what success would look like by 2020, and, secondly, the implications of the CMA’s ability to investigate an entire regulated market, focusing on the energy sector. A full summary of the seminar is available alongside our The UK competition regime report. Some of the key points made at the seminar were:

    An expectation that by 2020 the UK competition regime will produce a greater number of competition enforcement decisions, and that this should include more enforcement in the regulated sectors (where regulators such as Ofcom, the Financial Conduct Authority, and Ofgem have concurrent powers to enforce competition law).

    The Competition Appeal Tribunal’s new power to hear stand-alone cases, and the new collective redress route, offer potentially valuable alternative routes to the use of competition law by private parties. The extent to which this is the case should become clearer over the next few years.

    There has been a notable change since our 2010 report found strong disincentives to regulators referring their own markets to the CMA for a full market investigation reference (MIR). The seminar discussed the implications for institutional relationships, and highlighted the CMA’s support for the regulator (Ofgem), handing it a significant role in implementing remedies and making recommendations to improve Ofgem’s independence from the department (now the new Department for Business, Energy and Industrial Strategy – BEIS).

     
     
    Business awarenessThe CMA also took the opportunity to highlight its wish to make significant progress on another of the NAO’s key recommendations: the need to raise awareness of competition law among SMEs. As detailed in our report, business awareness of competition law is important in encouraging compliance, but it is currently low – as seen in the results of the CMA’s own 2014 survey of UK industry, showing only 23% of businesses felt they knew competition law well. A 2014 survey of public attitudes also found a relatively low awareness among UK respondents that price-fixing is illegal.

    One way the CMA aims to raise business and public awareness of competition requirements is to publish materials targeted at smaller businesses, including highlighting the results of successful cases to firms in the relevant sector, such as in the estate agent case study (below).


    Case study: Three Counties Estate Agents

    Estate agentsIn March 2015, the CMA issued a decision which found that a trade association, three estate agents and a newspaper publisher had breached competition law by agreeing to prevent estate and letting agents from advertising fees or discounts in the local newspaper. During the investigation, they admitted breaching competition law and agreed to pay penalties totalling over £775,000.

    The CMA followed up the case by working with the key trade association and other relevant bodies to distribute compliance material. It published open letters on the illegality of such practices and sent warning letters to a significant number of other estate and lettings agents, which it suspected had been involved in similar practices. The CMA estimates that its materials were distributed to 95% of UK estate agents and 75% of lettings agents. The CMA has subsequently received complaints and intelligence about similar practices elsewhere, resulting in it opening a further enforcement case.


    We are delighted that the seminar generated such useful discussion and sharing – and, of course, that the speakers welcomed the NAO’s role in holding the CMA and wider competition regime to account for its performance. This event was an excellent example of how the NAO seeks to drive public service improvement and illustrates why we are organised internally around the key issues facing government today, including through our specialist Regulation, Consumers and Competition team.

    We will continue to discuss and report on the competition regime’s success in realising its ambitions and creating the right conditions to transform the UK economy. Meanwhile, we would be delighted to hear your comments and invite you to contact us if you would like to discuss any issues raised by this blog, or more broadly regarding regulation, consumers or competition.
     
     
    Charles Nancarrow

    About the authors:

    Charles Nancarrow leads the NAO’s work on consumers and competition, and is strategic lead for the NAO’s markets work on consumer protection in public and private markets, and on the UK competition regime. He is a regular speaker at conferences and seminars.
     
     
     
    Peter LanghamPeter Langham is a senior member of the NAO’s regulation, consumer and competition team and leads the Office’s work on public service markets: developing best practice approaches, and coordinating a cross-government public service markets group. Peter also has extensive experience of assessing the effectiveness of the UK competition regime.
     
     


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  • 4 Comments

    4 responses to “Driving forward competition in the UK economy”

    1. Sirs,

      I cannot believe there is no overlap or recognition of the part robust procurement/commissioning has to play in driving competition. I would welcome some explanation for this please?

      • Charles Nancarrow says:

        Thanks for the comment, Howard. You’re right, competition is a broad topic. This blog post was intended, however, to reference the NAO’s recent work on the UK competition regime and to highlight the constructive nature of a follow-up seminar that was effective in helping to influence public sector improvement. In this sense, the competition issues in our report and seminar covered only the markets and competition work of UK competition bodies, in particular the Competition & Markets Authority, that apply the Competition Act, Enterprise Act etc.

        Of course, as the nation’s public spending watchdog, the NAO reports on other aspects of competition including government commissioning and procurement across many areas of the public sector (defence, health, transport, etc). You may be particularly interested in our reports on Commercial capability and contract management and on Commissioning. We have also covered such competition issues in previous blog-posts on contracting and commissioning, such as Joining the dots: the picture from government contracting and SMEs to VCSEs: barriers to benefits.

        Charles Nancarrow

    2. @JagPatel3 says:

      Competition, what competition? Particularly as it relates the defence sector.

      During an oral evidence taking session before the Public Accounts Committee which conducted an inquiry into Commissioning and Contracting with Smaller Providers earlier this year, the Comptroller and Auditor General asked John Manzoni, Chief Executive of the Civil Service the following question:

      “……. in which industry sectors would you say there is very efficient competition and in which is there less efficient? I would not say that there is particularly efficient competition in the defence industry. I’m not trying to be unkind, but considering the fact that there is only one major supplier in the UK, it is a bit difficult to see it that way. Which ones would you say?”

      The intent behind this question is absolutely clear. C&AG was seeking to elicit an honest view on competition in the defence industry, given that the coalition Government has implemented a number of key reforms in the last Parliament.

      It is not surprising that the Chief Executive of the Civil Service chose to avoid answering the question in any substantive way – least it should open-up a can of worms! It is easy to understand why, because the harsh reality is that competition in the defence sector is in a pretty bad place right now.

      Notwithstanding the fact that the clear message behind the Government’s defence procurement policy is that military equipment for the Armed Forces is to be purchased through fair and open competition.

      This is to be achieved by selecting the preferred Prime Contractor from a choice of industry teams by running a multiple-phase, winner-takes-all competition on the basis of a level playing field, genuinely open to all-comers including non-domiciled suppliers – to ensure it gets the very best value for money for the taxpayer.

      However, the ‘sudden death’ competition (which reduces the field of Bidders from six to one following a one-off release of the invitation to tender) currently used by MoD has been rendered ineffective by Defence Contractors, who are quoting identical bottom-line Selling Prices against the same Requirement – which amounts to price-fixing on a grand scale, with the active connivance of the Secretary of State for Defence. Worse still, MoD’s Project Team Leader at Abbey Wood, Bristol is being denied the opportunity to choose the single Prime Contractor on the basis of price competitiveness, and therefore value for money.

      This has come about because MoD’s long-standing policy of disclosing the total budgeted expenditure figure or associated year-on-year financial funding profile in the ITT has resulted in Defence Contractors quoting identical bottom-line Selling Prices in their ITT responses – an entirely predictable result!

      It is not for MoD to tell the Private Sector what the price of a new equipment programme should be. Instead, it is very much the business of Defence Contractors to tell MoD how much each new equipment programme will cost, based upon the prevailing value of goods, services, labour and finance in the free market shaped, not by the interfering hand of people in the pay of the State who always get it wrong, but by competitive market forces.
      @JagPatel3 on twitter

      • Administrator says:

        Many thanks for your comment, Jag, which we read with interest. We have also seen your longer submissions to PAC. NAO’s work on defence continues to try and shine a light on the challenges associated with procurement – both where there is competition and where there isn’t.
        Jeremy Lonsdale, Director, Defence VFM audit + Charles Nancarrow, head of NAO’s work on Consumers and Competition

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