§ 9.6 p.m.
§ Lord Hacking rose to ask Her Majesty's Government whether they will, as a matter of urgency, establish a fair and coherent competition policy to operate in the interests of the British economy and of British industries at home and abroad.
§ The noble Lord said: My Lords, with your Lordships' leave I shall pause, or take my early comments fairly slowly, because the noble Lord the Minister is not yet in your Lordships' House and he will be replying to the Question that I have tabled.
I stand before your Lordships to beg leave to ask the Question that stands in my name on the Order Paper. It may be of assistance to your Lordships if I remind you and the noble Lord the Minister of the terms of my Question. They are as follows:
To ask Her Majesty's Government whether they will, as a matter of urgency, establish a fair and coherent competition policy to operate in the interests of the British economy and of British industries at home and abroad.
§ From the terms of that Question, your Lordships and the noble Lord the Minister may detect an element of criticism against government competition policy. Indeed noble Lords may think that there is a suggestion in the Question which I have tabled that the Government have no competition policy, whether it is either fair or coherent. However, before the noble 1125 Lord the Minister feels too wounded by the terms of my Question, let me start, I hope, with some sympathetic words towards the Government.
§ Probably no government's competition policy has been under such pressure as this Government's competition policy now is. It is under tremendous pressure because of a recent spate of colossal takeovers. I refer to the Allied-Lyons takeover and the threat of a takeover by Elders IXL, although it appears from a recent development in the market that that takeover may have gone away. I refer to the rival takeovers of the Imperial Group by United Biscuits on the one hand and the Hanson Trust on the other. I also refer to the rival bids for Distillers by Argyll on the one hand and by Guinness on the other—a takeover of a company whose assets are currently valued at no less a figure than £2.4 billion. There are also other takeovers which are putting this Government's competition policy under pressure. In each of these takeover battles the Government's merger policy is being tested to the full, and in each of them the Government have thought it necessary to intervene and to order referrals to the Monopolies and Mergers Commission.
§ The starting point of this debate is where the last and excellent debate of 22nd January of this year ended. This was the debate which was so well introduced by the noble Lord, Lord Gallacher. Regrettably, I was unable to participate in it because I was in the United States of America.
§ Without going through the arguments again, I should like to adopt much of what was said in that debate by the noble Lord, Lord Bruce-Gardyne, who is happily joining us this evening in this debate, the noble Lord, Lord Williams of Elvel, and the noble Lord, Lord Gallacher. I therefore adopt the expressions of concern over the arrival of the US-style leverage bids, otherwise called LOBs. It may be that colourful language will enter into our market-place, such as "poison pill", "shark repellant", or "golden parachute". However, with the structure of these debt-financed bids being based not on the bidder's balance sheet but upon its target's balance sheet, with the blatant motives in them of the stripping of assets, I believe that these forms of takeover should be treated by us with worry and concern.
§ I also share the concern expressed by the noble Lord, Lord Gallacher, over the interests of shareholders and workers in recent takeovers. I share too the concern over the basis upon which the Government exercise their decision whether or not to refer a takeover to the Monopolies and Mergers Commission.
§ Therefore, it may be helpful if I run briefly through the procedural mechanics for examining these takeovers. These are partly to be found in the Fair Trading Act 1973 and partly in established government procedural policies. It goes roughly like this. There is an announcement of a proposed merger. Sometimes it is in the form of a bid and sometimes it is in the form of a statement of intention to bid. There is of course the other circumstance when there is an existing merger or an existing perceived monoply which can also be investigated. However, I am taking 1126 it when there is an announcement of a proposed merger.
§ After that announcement, there is an investigation by the Office of Fair Trading; and following that investigation there is a confidential report which is submitted by the Director-General of Fair Trading to the Secretary of State. After that report has been submitted, the next event is the Government's decision on whether to refer the proposed merger to the Monopolies and Mergers Commission. If the Government decide to refer the proposed merger, they set out for the Monopolies and Mergers Commission the terms of the commission's reference.
§ Then there is a long pause. It is obligatory under the terms of the statute to include the time frame. The time frame in almost every proposed reference is one of six months. In other words, the Monopolies and Mergers Commission is asked to report within six months, although there is a further extension which is sometimes granted by the Secretary of State of another three months. That is why I refer to the long pause between the referral and the report by the Monopolies and Mergers Commission.
§ The next event therefore is the report some six or nine months later. When the Government have received that report—if it is an adverse decision by the Monopolies and Mergers Commission who report that the proposed merger is against the public interest—the Government have an independent decision of whether to accept or reject the report. If it is the other way round, if the Monopolies and Mergers Commission reports that the proposed merger is not against the public interest, curiously under the statute the Government have no decision to make and have no right to overrule the decision. This is a feature of our current competition statutory law which the noble Lord, Lord Bruce-Gardyne, criticised when he spoke in your Lordships' House on 22nd January.
I would also remind your Lordships of the tests upon whether a referral is made which are set out in Section 64 of the Fair Trading Act 1973. Those tests are whether there is a quarter share of the market or whether the assets to be taken over exceed the value of £30 million. There are also public interest tests which are applied by the Monopolies and Mergers Commission. These are set out in Section 84 of the Fair Trading Act 1973. I give one example:
the desirability … of maintaining and promoting effective competition between persons supplying goods and services in the United Kingdom".
I am quoting from Section 84(1)(a) of the Fair Trading Act.
Out of this background I want to focus upon two serious problems which recent takeovers have painfully highlighted. First, the test of the market is a domestic test. Nowhere in the statute is this test set out in an international context. It is true that governments have frequently stated their regard for the international context. I quote, for example, the statement on mergers' policy by the then Secretary of State for Trade and Industry, Mr. Norman Tebbit. He wrote in these terms in a Written Answer to a Question put to him in the other place on 5th July 1984, at col. 213:
In evaluating the competitive situation in individual cases I shall have regard to the international context: to the extent of competition
in the home market from non-United Kingdom sources and to the competitive position of United Kingdom companies in overseas markets".
§ It is true also that the Government have repeated on a number of occasions their regard for the international context of the market share test. I refer, for example, to an admirable speech by the Minister, Mr. Michael Howard, on 29th October 1985. I refer to recent letters written to Mr. Bryan Gould and Mr. David Steel—which have been made public—by the Secretary of State for Trade and Industry. I can even refer to a Written Answer provided by Mr. Howard on the 17th of this month; in other words, only about three days ago.
§ The question is: how much are the Government taking into account the international context in the share of the market test? Your Lordships may recall that Sir Michael Edwardes wrote a letter to The Times on 19th February expressing considerable concern about the apparent failure of the Government to have sufficient regard for the international context of bids. I cite another example. Although 90 per cent. of the sales of the Distillers Company are abroad, the proposed merger, under the first Guinness bid, for the Distillers Company was referred to the Monopolies and Mergers Commission.
§ The second problem on which I wish to focus your Lordships' attention arises out of the current speed and force of movements in the market. As has been shown in recent takeovers, the market simply cannot wait for the Monopolies and Mergers Commission to report. Just look at what happened in the Imperial Group takeover! Just look at what happened in the Distillers takeover under the first offer of Guinness! Immediately those two proposed mergers were referred by the Government to the Monopolies and Mergers Commission the bids were withdrawn and large divestments were offered by each of those companies without any investigation as to the public interest and without any conclusions whether the proposed mergers were against the public interest. The problem is that a referral of one bid and not the other results in a one-sided intervention by the Government into the market.
§ The point was drawn to the attention of the Minister, Mr. Howard, and he made certain replies in an article reported in the Observer. I am unable to quote the exact replies of the Minister but, in substance, he questioned whether there should be concern over an "even-handed" approach. Of course, one understands the Minister when he is saying that when one proposed merger has been considered by the Office of Fair Trading and by the Government and a decision has been taken not to refer that proposed merger to the Monopolies and Mergers Commission, it would be wrong then to bring that first proposed merger under consideration again because a second bidder came on to the market.
§ Nonetheless, the statement by the Minister, in my submission to your Lordships, is a worrying statement. If the Government know that the consequence of a referral is to intervene in a one-sided manner into the market-place then, in my respectful submission, it is beholden on the Government to act fairly. We all know why it takes six months or even longer for the 1128 Monopolies and Mergers Commission to come to report, but that does not absolve the unfairness of a one-sided intervention into the market-place. Perhaps in the fullness of time other mechanics may come forward. Perhaps legislation could be passed for a temporary freeze on all bids while one bid is being considered by the Monopolies and Mergers Commission. But, until other mechanics come forward, I urge upon the Government, at this critical time when they are taking decisions on whether to refer the new bid for Distillers and the new bid for Imperial Group to the Monopolies and Mergers Commission, to take consummate care to act with fairness.
§ It is, after all, a wholly unsatisfactory result that referrals are now being used as part of the strategy of bidders to gain the prize in a takeover. This is not to criticise the companies who are legitimately using all rights available to then at law, but it is to recognise that the enthusiasm, for example, of the Argyll company to hold the Government to the earlier reference of the Distillers and Guinness merger to the Monopolies and Mergers Commission was part of their strategy to tie down the other bidder in the market-place. In general, it may be that at this present time, during this spate of takeovers—particularly those which have the characteristics of the US-style leverage bids—there should be more referrals to the Monopolies and Mergers Commission. But under present government policy there is unfairness if not clumsiness, and that is the reason why I have put down this Unstarred Question in your Lordship's House.
§ 9.25 p.m.
§ Lord Ezra
My Lords, the Question that has been posed by the noble Lord, Lord Hacking, is particularly approprite at the present time, even though it was only in January that a similar Motion was debated. I believe that it is very appropriate for two reasons: first, because there is a massive amount of change going on in the commercial and industrial world; and, secondly, the Secretary of State for Trade and Industry has decided that there should be a full inquiry into competition policy. I think it right that in advance of that inquiry the views of this House should be made known clearly on the subject, just as I hope that when the inquiry has been completed we shall have a full opportunity for debating its conclusions or recommendations.
The noble Lord, Lord Hacking, concentrated in his remarks on the recent crop of major mergers, but I believe that this whole question of reviewing competition policy should go beyond that. The mergers undoubtedly are attracting public attention, but questions of competition are raised by the increasing tendency for privatisation to be transferring monopolies or quasi-monopolies into the private sector. The professions are being progressively liberalised, and that raises questions of competition of a sort which previously did not arise.
There is the impending regulation of the financial markets which in due course we shall be debating here; and that again touches on the question of competition. Also, as recently as 11th March, Sir Gordon Borrie, the Director General of Fair Trading, raised the question of the need for the revision of the Restrictive 1129 Trade Practices Act 1976. Therefore I very much hope that when this review by the Secretary of State and other Ministers is undertaken it will cover competition in a wide sense. I feel that the value of this debate will be to draw attention to some of the issues which we hope will be looked at.
Perhaps I may just comment on one or two of those aspects. The question of privatisation of monopolies or quasi-monopolies is something which creates very special problems. The solution which has been proposed in the Bills that we have so far debated, or will be debating, is the creation of new regulatory bodies. A number of your Lordships who participated in the debate on the Telecommunications Bill will recall that we spent some time debating the relationships between Oftel, on the one hand, and the existing body, the Office of Fair Trading, on the other, to decide who exactly was responsible for what. As more of these regulatory bodies are created for special purposes, more of these problems of the delimitation of responsibility are likely to arise.
The whole panoply of organisations dealing with the question of competition is already pretty complicated. It will become increasingly complicated as these new bodies are created Yet what we should be going for, if they are to be effective, is simplification rather than complication. I think there is a real task here to review the whole range of these bodies and see how they inter-relate.
When we come to the question of mergers, a number of very important issues were raised in the debate on 22nd January. The noble Lord, Lord Hacking, has referred to some of them. I should like to refer to one or two other points that were raised during the course of that debate. It was suggested, for example, by the noble Lord, Lord Williams of Elvel, that the way in which the merger policy was working at the moment tended to favour conglomerates being extended in their diverse operations rather than to encourage justified industrial concentration. I think that that is a really serious issue and I fully agree with what the noble Lord, Lord Hacking, said about the international dimension.
We are, after all, meant to be an integral part of the European Community market, and to look at a particular bit of the market, in respect of the impact that it could have as to one part of a firm's operation within just the United Kingdom, does not seem to me to be particularly relevant these days in the case of major industrial organisations. We should be gearing ourselves up to be fully competitive in the European and world context and not to look at matters merely in the United Kingdom context. That issue needs to be looked at again.
The role of the Monopolies and Mergers Commission when referrals take place was also mentioned by the noble Lord, Lord Hacking. It seems to be a weakness of the whole procedure that the inquiry takes so long. I believe that it takes so long because the Monopolies and Mergers Commission is probably not particularly geared up for the task. One point that should be looked at is whether it should continue to have the remit to carry out inquiries into nationalised industries.
As was said during the debate on 22nd January, I believe by the noble Lord, Lord Gallacher, the sort of 1130 inquiry which it carries out into the efficacy, or otherwise, of the nationalised industries could be carried out by any one of a large number of very efficiently organised consultants. The job could be put out to tender, and it could be done quite adequately by those people. The monopolies and mergers resources could be reserved for the special type of work which could not, of course, be put outside government organisations.
There is the question of what happens in the case of a bid when a referral is made about one of the parties involved and another bidder is left free to proceed. It seems wrong that that should be possible. If the inquiry by the Monopolies and Mergers Commission could be speeded up, it would not be unreasonable for the situation to be frozen while the inquiry took place so that at the end of the inquiry it would be clear what was the outcome of the referral.
The noble Lord, Lord Bruce-Gardyne, who will speak in a moment, also raised some very interesting issues about the onus of proof and whether the onus of proof as to the public implications of a bid should not be transferred to the bidder. I think that here, too, one might have a very careful inquiry.
Let me turn next and finally to the financial services which are presently being considered. The Financial Services Bill is going through its Committee stage in another place and will shortly be coming to your Lordships' House. We shall have a whole panoply of new regulatory bodies. I hope that they will be as simple as possible and clearly defined in their operation; but that remains to be debated. What is relevant to our discussion tonight is the relationship which that new grouping of regulatory bodies will have with the Office of Fair Trading. I believe that that is another aspect which needs to be gone into pretty thoroughly when the Secretary of State conducts his inquiry.
I hope that this inquiry—I fully support the intentions behind it—will roam wide over this field which has changed very considerably since the last inquiry was held in 1978. I hope that as result of it, we shall have a system which links together the various bodies which are in the process of being set up at the moment to deal with various aspects of competition, and that we will be provided with a system which is comprehensible, reasonably flexible and fair.
§ 9.35 p.m.
§ Lord Sanderson of Bowden
My Lords, at the outset I feel bound to take issue with the inference in the Question asked by the noble Lord, Lord Hacking, that the Government's present policies and arrangements on takeovers are unfair or incoherent, except perhaps to say, as far as unfairness is concerned, that the timing problem raised by the noble Lord, Lord Ezra, just now, and by the noble Lord, Lord Hacking, deserves a lot of inquiry when the inquiry gets down to business.
It seems to me that the policies at the moment are neither unfair nor incoherent. The present policies were formulated by the then Secretary of State for Trade and Industry in July 1984 and reaffirmed by my noble friend Lord Lucas of Chilworth as recently as 10th March here in your Lordships' House. They seem perfectly fair, coherent and easy to understand by all parties concerned in a takeover bid or merger.
1131 I can tell your Lordships that a few years ago I myself had to go before the Monopolies and Mergers Commission. I know only too well that the drill is understood, but it takes a long time and a lot of work is involved, which is very upsetting, particularly to smaller companies which have to go before the Monopolies and Mergers Commission. There are already adequate safeguards in place for most situations. There is a review in the first instance by the Office of Fair Trading, which reports its findings to the Secretary of State, who may then decide to refer the matter to the Monopolies and Mergers Commission.
However, we now live in the days of so-called mega-bids and we read of private detectives and dirty tricks; our newspapers are full of what can only be described as knocking-copy advertisements. None of these things, I hasten to add, is unlawful, but some may feel as I do that they are of doubtful ethics. So in these circumstances there are grounds for a review of the present policies and attitudes and, as I understand it, the review which is about to take place and which is promised for later this year will sort out a lot of the problems and should be debated by all interested parties.
But the main points that I should like to make are these. It seems to me that the Government's present policies on takeovers are fair and workable in most aspects, though there are perhaps some areas for relaxation and increased flexibility. The noble Lord, Lord Hacking, asked whether the present policy is fair, but is it not true to say that if, in the name of fairness, any or all bids for a company were referred as a matter of course, then it could become a standard defence for any target company? The target would simply find a suitable and amenable friend with a similar product base to make a false or friendly bid qualifying for referral, thus excluding the more serious bidder, perhaps to the detriment of the target company, its workforce, its shareholders and, in the final analysis, the national economy—which brings me to my next point.
Are takeovers beneficial to the nation and to the economy as a whole? If the answer is yes, I would ask your Lordships to consider the two most common kinds of takeover; that which is little more than a marriage of convenience and that which will revitalise or re-energise a complacent company which is merely drifting along.
The first example is this. In such a merger, neither partner seriously believes that it can improve the actual performance in any dramatic way. They are merely pooling resources with the hope of eventual world domination in their product; in other words, they are deliberately trying to create a monopoly. Their argument is that bigger is not only better but best. Monolithic monopolies will argue that like should join like without regard for the differences in quality, cost and market penetrations of their products.
We have a classic example in the shape of British Leyland. Here we had several profitable manufacturers of different types of vehicles which were amalgamated and, as we all know, have been struggling ever since. What of the marriage of Dunlop and Pirelli whose dreams of world domination in 1132 rubber-related products nearly brought them to their knees? It is only under the sound and considered management of BTR over the past year, an industrial management company not previously known for its expertise in rubber products, that Dunlop is now recovering and enjoying a new lease of life, which in places like Barnsley, where a factory which was just about closing is now doing extremely well, is very obvious.
Let us take the second example, the so-called hostile or contested takeover. In this instance, one company perceives that another company is under-performing and would do better with new and more vigorous management. It believes that with its own particular brand of knowledge and expertise it can revitalise both boardroom and line managers alike who through a complacent lack of motivation have become set in their ways and sluggish in their methods. The bidder believes that its expertise can maximise the target's assets and heighten performance for the benefit of employees, shareholders and local communities alike. There may be no product match but there are sound management principles which will ultimately benefit everyone, including the nation and the economy.
Perhaps I may summarise the position as I see it. I must concede that there may be some case for a review, and I think it is proper that the public interest policy should be carefully re-examined. The market framework rewards efficiency and makes incompetent management vulnerable. This serves everyone well. Such regulation as is necessary must be clear, fair and strong. It is important that information is made equally available to all shareholders. It is wrong that the Office of Fair Trading procedures can be steered round and loopholes sought out by sharp practitioners. It is essential that the role of the merchant banks in the takeovers of these mega-bids should be carefully examined.
We should also clarify those policies on mergers which do not compare favourably with other countries and contain many ambiguities which foreign investors may not understand and which may impede their much-needed investment in the future of this country. Industrial investment these days crosses most national boundaries at will. That is why we see a larger investment now by British companies in the United States of America than the other way round. I look forward to hearing the results of the review that is about to take place, which I believe is very essential for the future wellbeing of the competition policy of the Government.
§ 9.43 p.m.
§ Lord Bruce-Gardyne
My Lords, I should like to join other noble Lords who have welcomed the debate which the noble Lord, Lord Hacking, has initiated this evening, for although we discussed these matters only a few short weeks ago, we live in fast-changing times and a fast-evolving climate. Like my noble friend Lord Sanderson, I think that the wording of the noble Lord's Question is a little astringent towards the Government. For precisely the reasons which my noble friend has advanced, I have doubts about the possible consequences of, as the noble Lord, Lord Hacking, suggested, putting contested bids on freeze. I am not as convinced as the noble Lord, Lord Hacking, seemed to be, and indeed the noble Lord, Lord Ezra, too, about 1133 the undesirability of referring bids under circumstances which appear to take little notice of the international environment.
It seems to me that the essential consideration for the MMC can quite legitimately be the impact on domestic competition. The MMC itself is of course empowered to approve a takeover. Indeed, it has frequently done so, notwithstanding the resultant large market share in the United Kingdom, precisely on the grounds of the international market place and the degree of international competition. I do not see that the existence of the international market place and international competition should be regarded, as the noble Lord, Lord Hacking, almost seemed to be suggesting, as a good and sufficient reason for waving a particular takeover proposition through.
I, like my noble friend Lord Sanderson, would not indict the Government's present policy on those matters on the grounds either of unfairness or of lack of coherence. I am less sure about that policy's appropriateness under present circumstances. I listened with great interest to the response of my noble friend Lord Brabazon to the previous debate, to which there have been several references made. I looked at it again in preparation for tonight's discussion. I must admit that my noble friend was conceivably slightly complacent. He put forward essentially three propositions in support of the Government's attitude to takeovers and mergers as it currently stands.
The first was that it had the advantage of stability and predictability, which the markets like. On the whole, I would be prepared to accept that argument, although one must always remember that there is only perfect tranquility in the grave. My noble friend pointed out also that there was a substantially smaller volume of takeovers currently, although we were occasionally staggered by the mega-bids that sometimes follow each other from day to day. He stated that there was a somewhat smaller volume of takeovers and acquisitions occurring now than in 1972. I am bound to recall that the sequel to that large rash of acquisitions was not entirely happy.
Thirdly, my noble friend pointed out that it was appropriate to assume under normal circumstances that the shareholders would know best. I would agree with that if it were the shareholders who were essentially taking the decisions. Nowadays, however, the decisions are essentially taken by investment managers, who are in loco parentis for the shareholders. Very small numbers of them determine the fate of massive bids, and I sometimes feel that they are open occasionally to somewhat dubious influences.
Here I turn to the role of the financial intermediaries, to which reference has already been made. I noticed that the other day Sir Gordon Borne wondered about the problems arising from what he termed the steady drip of encouragement and over-encouragement to borrow from so many quarters. He was referring to the competition for our custom from the building societies, banks, and now, even the "Pru" in consumer lending.
I sometimes wonder whether there is not a similar and possibly dangerous pressure building up in the corporate sector. Tonight there has been reference 1134 made to the whole business of leverage bids. We are reaching a condition where some of the merchant banks are almost appearing to play in the role of what are know as "ambulance chasers"' among the learned attorneys of the United States. Such people go to a possible punter in the bids scene and say: "We have a marvellous suggestion for you to take over Amalgamated International. If it is successful, we shall charge you only £1 million for our fees. If it is unsuccessful, we shall charge you only £½ million. In any case, with luck we will persuade United International to foot the bill". It seems to me we have the financial intermediaries playing the role of innovator and sponsor to an extent which must be open to question.
More fundamentally—and we discussed this issue to some extent on the earlier occasion in January—to my mind it is not primarily the question of whether Argyll makes a better suitor for Distillers than Guinness or whether Hanson makes a better suitor for Imperial than United Biscuits which should be worrying us. It is whether in any of these cases it is necessarily logical to assume that the sum will be greater than the separate parts. However much the management of the Imperial Group may protest, I do not think it has convinced anyone very much that it is keen to fly into the arms of United Biscuits out of a sense of mutual admiration so much as out of a sense of mutual fear. That is the climate in which, to my mind, increasingly corporate decision-making is being impelled to take place.
In his Budget Statement my right honourable friend the Chancellor suggested, I think, that one of the expectations of enchanced future employment should stem from the acquisition of a larger market share both at home and abroad by British businesses, encouraged by the considerable fall in the exchange rate against the deutschemark and the yen. I wish him well in that and I should like to hope for the best, but the fact is that the management of a corporate quoted company, with predators lurking round the door, is going to find it very hard to opt for a larger market share, whether at home or abroad, and the consequent potential employment increase that might follow therefrom, when the alternative of a larger margin is the one, and the only one, that is likely to keep the predator away. That is why I must say I still feel that we are perhaps too complacent in our attitude towards the great merger boom when one considers the impact that it is liable to have on corporate management motivation.
I made clear during our previous debate, and the noble Lord, Lord Ezra, was kind enough to refer to this, that I have for long felt that there is at least a case to be examined for switching the onus of proof in these situations from the Little Red Riding Hoods defending their independence to the wolves to defend their justification for making a meal. I still hold that view. I hope, at least, that the review which is proceeding in my noble friend's department will embrace that consideration and also, as other noble Lords have already suggested, the somewhat exotic role which the banking system and the financial intermediaries apparently play in the market-place today.
§ 9.54 p.m.
Lord Bruce of Donington
My Lords, it would seem that I have read an almost totally different subject for 1135 debate from the text of this Motion than has so far been discussed in your Lordships' House. The Question reads:To ask Her Majesty's Government whether they will, as a matter of urgency, establish a fair and coherent competition policy to operate in the interests of the British economy and of British industries at home and abroad".I have no doubt that the noble Lord, Lord Lucas of Chilworth, will be able to reply to the somewhat specialist contributions, if I may call them that, that have been made in your Lordships' House this evening. If I may say so they were highly skilled and informed contributions, but they dealt essentially with a very restricted part of the whole economic picture of this country.
Personally speaking, I should have preferred to discuss questions of takeovers and mergers and matters of that sort within the wider context of the Bill on financial services that will shortly come before your Lordships' House, or, in a more specialised sense as applied to a particular monopoly industry, when the gas privatisation Bill arrives in your Lordships' House for detailed consideration.
Therefore, with your Lordships' permission, I propose to range a good deal wider than the terms of the highly skilled speeches that have been made to your Lordships tonight, which dealt with matters affecting primarily the City: questions of who is the predator, which powerful interest will take over another more or less powerful interest, whether there is leverage finance which is solicited or otherwise, and whether, if it is leverage, it will lead to asset stripping in order to pay off the original loans from which the finance was derived. These are very important questions and the Government have undoubtedly devised certain rules in order to deal with them. I prefer not to go into details about any of these particular matters, which are highly specialised and which affect the City in particular and those with very powerful financial resources who, if I may say so, are somewhat remote from the ordinary people who form the great bulk of the population of the United Kingdom.
I therefore propose to touch on competition policy in a much wider context, where these matters simply represent the froth on top of the underlying trends with which I propose to deal. The Question asked the Government to enunciate a fair and coherent competition policy. Of course, there is no coherent competition policy at all. In broad general economic terms the policy of the Government is to leave everything to market forces and to allow firms to compete. That determines the whole level of the economy, including the prices at which people may buy, the level of employment, the extent to which our exports are acceptable abroad and the extent to which there is or is not a flood of imports.
What the Government have by way of competition policy is policy by declamation. I am quite sure that the noble Lord will confirm that the policy consists in having to be more competitive. That is really the entire essence of the Government's policy. Time after time we are told that the nation has to produce at prices that are competitive—particularly for its manufactured goods, as we all well know—in order that we can pay our way in the world.
1136 This is the ostensible policy—nothing more—uttered with ever-increasing emphasis by the Prime Minister in the substitute for any coherent industrial policy: "We have to be more competitive". Indeed, in elaboration of that, we had from the Chancellor of the Exchequer, in the course of his Budget speech, the fact that unit labour costs were continuing to rise and that the greed—he had the impertinence to use the word "greed"—of the wage-earner was lying at the base of not being able to tackle unemployment effectively—greed!, when greed is the main motive force behind these massive moves within the City by people who have thousands of millions at their disposal and want to have further aggrandisement and increase their power.
I want therefore this evening, if I may, to deal clinically with the whole question of competitiveness. As I see it, competitiveness is being able to supply goods and services at prices—I emphasise the word "prices"—which find a ready market, either at home or abroad. I take it that I will carry your Lordships with me in that simple proposition.
May I take your Lordships a little further? The price is essentially made up of cost and profit. There can be little argument about that. The cost is automatically reflected in unit labour costs; costs per article, costs per job, costs per batch—whatever it may be. Unit labour cost in itself is comprised of a number of items. There are the wages paid; the factory on-costs; the variable overheads and the fixed overheads. Included in the factory on-costs must be the amount of depreciation of the plant and machinery and, if it is prudent, replacement.
It is immediately clear, therefore, that when unit labour costs are referred to, the extent of the true wage content of unit labour costs is very much dependent on the machinery and plant for which labour is applied to produce the article. Perhaps I may say straight away (and your Lordships will agree with me) that if, for example, an employee is paid 100p to punch 100 holes in separate pieces of metal with a machine that will punch one hole at a time, then there is a cost of 1p. If, however, instead of being able to punch one hole that machine punches two, then the productivity goes up and the unit labour cost goes down and is in fact halved.
Therefore, when the Government refer, as they do, to the necessity to reduce unit labour costs in order that our goods may be priced more effectively, more competitively, they must admit (but they do not say) that the extent of investment in plant and machinery upon which labour is required to work for its wage is a very vital factor indeed in determining unit labour cost. Over the past seven years—seven years following upon the advent of this Government—investment in manufacturing industry is still 18 per cent. below what it was in 1979. Small wonder, then, that there is continued complaint about unit labour costs rising!
What is never said is that the reason for that lies not merely in the level of wages to which the Chancellor of the Exchequer is unscrupulous enough to give his continued attention and emphasis, for the sake of his admiring fellow Members of Parliament, but also that the level of British competitiveness is in part a reflection of the gross under-investment in British 1137 manufacturing industry that has occurred in the past seven years. Indeed, whatever figures the noble Lord, Lord Young of Graffham, may selectively produce covering a convenient two or three-year period since 1982 or since 1983, the fact is that wage levels as such in the United Kingdom are still below those in Germany, in Italy and in France. To blame the lack of competitiveness upon the wage levels of this country—the wages paid to the ordinary people in the little streets of Britain—is entirely unscrupulous and unworthy of people who carry out any intelligent research into the facts.
What is not realised is this. I come back to my original statement of price being a combination of cost and profit. I have already dealt with costs in terms of unit labour costs. What is not mentioned, although it is boasted about by the party opposite within a different context, is that profits have gone up by between 30 and 40 per cent. over the past three or four years. Things are extremely prosperous. And profits together with costs are the determinants of prices. It is wise, I believe, to clear up the point clinically, clearly and beyond any doubt so that we can avoid in future blaming the level of the wages of the ordinary individual in this country as the reason for British goods proving uncompetitive abroad.
There is another reason, too. It lies in the exchange rate. The Government now accept, although they do not formally admit it—save indirectly—that the forcing up of the exchange rate in this country to a point where the dollar in November 1980 stood at 2.45 dollars to the pound following the absurd rise in interest rates that took place in the previous year—the daftest step undertaken by any Chancellor of the Exchequer for about the past 100 years; a really idiotic effort combined with the abolition of exchange control—meant that competitiveness in terms of competitive price, expressed in overseas currencies, made exports virtually impossible save in extremely exclusive goods, in respect of quality, delivery and anything else.
Lord Bruce of Donington
My Lords, I shall give way in a moment. I wish to complete this point.
This was so much so that in the five or six years to the end of 1985 there were 106,590 bankruptcies and liquidations in the United Kingdom, 71,000 of those being companies. The current rate in January 1986 is still maintained at about a level of 21,000 bankruptcies and liquidations a year. These are all matters which have an impact on competitors. I shall now give way to the noble Lord.
§ Lord Bruce-Gardyne
My Lords, I wondered whether the noble Lord could explain to the House his references to exchange rate policy in 1979. Are we to understand that had exchange controls been retained it is the judgment of the noble Lord that the exchange rate would not have risen so far or as fast as it did? Are we also to understand that something like the 25 per cent. appreciation in the sterling/dollar exchange rate which occurred before May 1979 was attributable to 1138 the expectation of a rise in interest rates under the Government which took office in May 1979? I am not altogether clear about either of those two points.
Lord Bruce of Donington
My Lords, I am very pleased to answer the noble Lord. I think that the removal of exchange controls in itself was not such a valid factor. What I am concerned with—and what was clearly revealed in evidence before the Select Committee of your Lordships' House—is the very substantial rise of interest rates from 12 per cent. in May 1979 to around 17½ per cent. later on in that year which caused an influx of money into this country that had to be re-lent. The influx itself, together with the growing production of North Sea oil, helped to force up that rate of exchange to an unacceptable height. That very severely inhibited our competitiveness. Moreover, it had its side effects in the United Kingdom. From the point of view of the Chancellor of the Exchequer it was extremely advantageous because the rate of exchange encouraged imports into this country at a price with which it was virtually impossible for many manufacturing firms in the United Kingdom to compete. Hence there was the spate of bankruptcies and liquidations at that time.
If any noble Lord cares to argue against that, or against any of these propositions, he has only to refer to the Select Committee Report on Overseas Trade which was recently debated in your Lordships' House. It is there amply documented.
I raise the point simply on the basis of being competitive and having competitive prices abroad. I seek to lay once and for all the allegation that it is wage rates in this country which are responsible for British goods being uncompetitive in overseas markets. Indeed, it is somewhat obscene in many ways that those people in the City of London—the big cohorts who are busily giving themselves rises in salaries of 20 per cent. and 30 per cent.—have the audacity to refer to the extremely minor rise in real wages which has taken place in this country over these years. It is 17 per cent. in real terms since 1979 we were told, somewhat boastfully but in a different context, by the Financial Secretary speaking in another place last night.
Competitiveness is supposed to be a virtue. So long as everything is left to market forces and to competition and to price, this is the answer to the problem. The difficulty for the Government is that they cannot reconcile these policies as being universally applicable.
I shall put this one point to the noble Lord because I do not want to detain him or the House very much longer. If competition is such a virtue, why is it not applied in the agricultural sector? It is alleged that Government subsidy, help, and co-operation somehow corrupt any industry which they touch. The farming industry in the United Kingdom has received aid equivalent to £50 billion in 25 years. It is subsidised very largely at the expense of the consumer but to the extent of £1 billion by the Government themselves, and it has achieved increases in productivity of 67 per cent. in those years.
It seems that the Government are two-faced about this. If competition and the weakest go to the wall with the devil taking the hindmost is really the correct 1139 philosophy for Britain, if that is the way in which the whole of the economy may be salvaged, why is it not practised here? Why does agriculture not have the benefit of this wisdom? The answer is that the Government are two-faced about it.
So far as concerns the shire counties, from which the bulk of the Government's political support comes, it is quite in order to give massive aid through the common agricultural policy itself, which costs this country roughly £1 billion per annum anyway, while other areas are exposed to free competition. However, there is no free competition for agriculture. There is no question of over-production there; there is no question of the over-capacity which they talk about in the steel industry and in various other industries. All that happens is that everything it produces is sold into intervention at a price which is already fixed, whether or not there is any demand for it whatever. Therefore, in this respect the Government suffer from a political schizophrenia.
We require from the Government an intelligent and coherent policy; one that stands up to the needs of the country. If the Government can enunciate a constructive policy, if they can enunciate a consistent policy as regards agriculture, which employs 2 per cent. of the population, as against industry and the services which supply the remainder, the House and the nation will be greatly obliged. I wish the noble Lord luck in enunciating it.
§ 10.17 p.m.
§ The Parliamentary Under-Secretary of State, Department of Trade and Industry (Lord Lucas of Chilworth)
My Lords, luck I do not need! What I need in your Lordships' House when I am answering the noble Lord, Lord Bruce of Donington, is a reasonableness in attending to the facts that lie before us. I feel quite sure that the noble Lord opposite will give me that tonight.
I was a little sorry that the noble Lord, Lord Hacking, in his Question on 10th March drew particular attention to a number of specific issues in connection with mergers, which I answered in part at col. 397 of Hansard of that date. I am sorry to tell the noble Lord—and I mean this quite sincerely—that apart from some generalisation to which I shall refer a little later, I can add nothing to that which I said on that date.
Vigorous competition in the world market-place is by far the most effective means yet devised to ensure that prices are kept down, that businesses are run efficiently, that the advances of science and technology are incorporated in innovative products which are offered in the market-place, and that consumers, whether they be prime consumers or ultimate consumers, obtain the products that they want from as wide a choice as is available to them.
The underlying objective of competition policy is to contribute towards those goals by fostering vigorous competition wherever possible. In that, I agree totally with the noble Lord, Lord Bruce of Donington, because (and he will forgive me for saying so) I thought that that was the most honest part of his speech tonight. Very much later he went on to invite me to 1140 agree to the simple proposition that prices were the real element in competition within the context in which I am quite sure we are both speaking. No, not price alone, and he well knows it, because quality comes into it. I shall return to the noble Lord's point if I have time about unit costs, but quality and competition go hand and hand and price is not the only factor to be considered.
If I may borrow the words of the noble Lord, Lord Hacking, in his Question, I agree that we need:a fair and coherent competition policy to operate in the interests of the British economy and of British industries at home and abroad".I think though that I should have preferred to say that the policy should operate in the interests of British industry and commerce at home and abroad and of British consumers. I return again to the point I have just made, that a consumer can well be the buyer of the raw product as well as the manufactured item. Where I part company with the noble Lord is in his suggestion—and of course some noble Lords this evening will not be surprised that I do part company here—that we need to establish such a policy. I do not claim that existing policy is perfect in every possible respect. I do not claim that it is not capable of further improvement. But I claim that we have a policy which is fair and coherent and which, on the whole, has served the economy well.
The noble Lord, Lord Bruce of Donington, widened the discussion quite considerably, and I am grateful to him for that, but I am certainly not going to enter into any discussion with him tonight about agricultural policy. What I would say is that while the noble Lord opposite has widened it a little extravagantly, the noble Lord, Lord Hacking, has been a little too narrow in his dealing with the Question he has put down. I believe that for a debate of this nature there has been too much talk of mergers policy. I understand the reason for that. There is no denying, as my noble friend Lord Brabazon of Tara said a couple of months ago, that we are experiencing a peak of merger activity.
I think though that it is worth reminding your Lordships that the current level of merger activity falls way short of the peak reached in the early 1970s, but of course mergers dominate the financial pages of the press other than, if I may say so this evening, the news which every newspaper carried on its front page today, that of the engagement of His Royal Highness and Miss Ferguson. This was, I am quite sure we would all agree, delightful. We wish both these young people much happiness in the future. When I saw this on my return from East Germany this morning, what a welcome relief it was from some of the headlines that have dominated our press in the last few weeks.
Having said that, let me return to the subject of our debate. Of course news of mergers dominates the press, and of course government decisions in relation to them also attract attention. But the question before us this evening is about competition policy as a whole; about the need for a coherent policy. This takes us far wide of the merger field. It takes us into unsung areas where nevertheless much valuable work is being done. I trust that the House will allow me for a few moments to range a little wide of the points of the noble Lord, Lord Hacking, because I need to demonstrate, having answered three Questions in your Lordships' House 1141 over the last three months, that we have that coherent policy which some noble Lords complain that we do not.
A key objective of competition policy as a whole is to prevent unwelcome distortions which can arise when a firm abuses a dominant position in a market. One way in which firms can acquire dominant market positions is by merger, and our mergers policy provides a way of dealing with this. I will return to that point shortly. But, equally important, we have powers to act against the monopolistic practices of companies already in a dominant position in the market and against the practices of companies who seek to reduce or to eliminate competition. In the normal course, it is the Director General of Fair Trading who initiates investigations into these questions under the provisions of the Fair Trading Act and the anticompetitive practice provisions of the Competition Act 1980.
There has been a steady stream of investigations under these powers. In some cases, the commission has found no detriments to the public interest. In others, the director general has identified ways in which firms have abused their positions and whether business has been affected as far as customers or consumers are concerned. In many cases, appropriate undertakings have been negotiated by the Office of Fair Trading and conscientiously put into effect by the companies which have been in discussion with him.
The other major plank of our competition policy is the restrictive trade practices legislation. It would be wrong of me at this late hour to go into full details. The essence of this legislation is the control of cartels; its particular targets are price fixing and market sharing agreements and other collusive arrangements. This has worked, particularly in the service sector agreements which have been embraced by the 1976 legislation. This has been done by a process of negotiation with the parties and has resulted in a modification of their attitudes. In this field, as in the field of monopolies and anti-competitive practices, there is a steady level of painstaking activity at the Office of Fair Trading which is, if I may say so, making a very worthwhile contribution to the maintenance of fair competition—and I underline the word "fair"—in the United Kingdom. Frankly, I pay tribute to the work which is done in this field by the Director General of Fair Trading and his staff.
The noble Lord, Lord Ezra, and my noble friend Lord Bruce-Gardyne, raised the point which I think was contained in the Director General of Fair Trading's speech a short while ago when he was describing some of the influences that had been brought to bear on him, some of the effects of his decisions and some of the ways in which the Office of Fair Trading might move. He has been in charge of the day-to-day implementation of the Act, and it is not surprising to me, anyway, that he should not give views as to how this might be improved. Let me say directly to the noble Lord, Lord Ezra, who I think really raised this particular point that, as Sir Gordon rightly says, the Government will be taking proper account of, and will give consideration to, the issues he raised.
I said that I would return to the point about mergers, which was essentially the noble Lord's main thrust in 1142 opening this debate this evening, which, as he said, is timely. I do not think that I should expand overly in detail about our general policy so far as mergers are concerned because I think that is well known. It was ably set out to your Lordships by my noble friend Lord Brabazon of Tara less than two months ago.
At its briefest, the policy is that references to the Monopolies and Mergers Commission are made primarily, though not exclusively, on competition grounds, and in assessing the situation in a particular case the Government take into account the international dimension. Again, the noble Lord, Lord Hacking, and the noble Lord, Lord Ezra, referred to what I might describe as an even-handedness of approach in these matters. Some of your Lordships may believe—and I recall debates in your Lordships' House earlier—that even-handedness requires that either both bids or neither must be referred in such cases. I naturally accept the case for even-handedness, if by that is meant that each case is considered in an impartial manner, taking into account all the relevant circumstances, including the existence of a competing bid where there is one.
In this sense, my right honourable friend the Secretary of State for Trade and Industry has certainly demonstrated an even-handedness of approach. But would it be right to take even-handedness to the extreme of suggesting that whenever there are competing bids they must either both be referred, or neither? In fact, we frequently have the situation where no two competing bids are the same: they invariably differ very widely in the range of public interest considerations to which they give rise. For example, one may have clear implications for the degree of competition in a significant part of the United Kingdom market, while the other may have no such implications but an alternative. It would be quite wrong to treat each in an identical manner because if that were done the treatment would be quite arbitrary and would lead to absurd results.
I want to touch very briefly on the international dimension. In assessing the competitive situation in a particular case, we take into account the extent of competition in the home market from United Kingdom sources as well as from non-United Kingdom sources. For example, in a market in which the competition from non-United Kingdom sources was particularly strong, we would take a less serious view than in other circumstances of a merger which increased the concentration of United Kingdom producers. Similarly, if there were a clear and undisputed case that a proposed merger would enhance the competitive position of United Kingdom companies in overseas markets, this would be a factor to be weighed in our consideration.
The matter is essentially one of judgment, of weighing a range of factors and reaching a balanced decision. This means inevitably that a decision in any particular case can be finely balanced and open to argument. What is not open to argument, I suggest, is that in all recent controversial cases where it has been relevant, the international dimension of competition has been carefully taken into account, along with all the other relevant circumstances, before a decision was reached.
1143 The noble Lord, Lord Hacking, raised in particular the leveraged takeover bid. I just want to say this to the noble Lord. He was kind enough to write to me, and I thank him for that. He knows that we do not agree. I think it would be important to tell him essentially why, on his main point, we do not agree. The Elders bid for Allied-Lyons was referred to the commission precisely because its method of financing raised potential public interest issues. My noble friend Lord Bruce-Gardyne mentioned that in his contribution. On the other hand, the financing of the Argyll bid for Distillers turned out on examination to be very much more conventional. My right honourable friend took the view that public interest issues were not raised in that case.
Let me give an assurance to the noble Lord that we are keenly aware of the issues that are raised by virtue of his Question and we shall, of course, take that aspect into account in our consideration. My noble friend Lord Sanderson, in what I must say was a speech that was helpful to me anyway, raised one or two interesting points. He spoke about what I translate as some of the dirty tricks that the City is perhaps up to, or put in a kinder way, some of the devices that the City is now using. As he knows, procedures are available under the law for illegal practices.
Merchant bankers' activities have been subject to recent changes by the Bank of England as well as the Stock Exchange. I do not wish to dodge the issue that the noble Lord, Lord Bruce of Donington, raised, but we shall have an opportunity to discuss those wider issues when the Financial Services Bill comes to your Lordships' House.
If your Lordships will allow me, I want to touch for two or three moments on a couple of the points that the noble Lord, Lord Bruce of Donington, made. I always like discussing matters with him. He asked in his speech whether we were going to allow the devil to take the hindmost. I find it odd that he should ask me that as he has picked up the devil and thrown him at me. I pick up the tail and throw it right back at him, because he talked to me about unit labour costs. How can he ask me that in a debate of this kind? I ask him: what about the print unions, which insist upon still being hired to do jobs which do not exist, and which will not allow natural competition and the evolution of technology to move forward to advance their members' careers and jobs and the betterment of the newspaper industry? He talks to me about unit labour costs! I shall certainly give way, but he should not think that I have finished with the matter because I will not allow him to get away with that tonight or any other night.
Lord Bruce of Donington
My Lords, I am most grateful for the noble Lord's vigour in replying to that 1144 point. With the permission of the House, may I point out to him that I was merely giving a technical analysis? That is all. What I want from the noble Lord, if he can be constrained to give it to me, is any dissent he may feel from the technical analysis that I gave, without for one moment discussing its implications for the printers or, indeed, anyone else.
§ Lord Lucas of Chilworth
My Lords, if the noble Lord would provide a technical analysis instead of making a political attack, I should be delighted to deal with it, because in the earlier part of his speech he spoke about the greed—I think that he spoke of the City and other issues—that was demonstrated and fortified by the speech of my right honourable friend the Chancellor of the Exchequer in another place last night. My noble friend opposite has worked extremely hard and we have been right through Hansard between the two of us, but there is no mention whatsoever of greed. So I ask the noble Lord not to tell me things like that in a debate of this kind.
I do not think that I can offer anything more in setting out the Government's policies. I suggest that the existing range of instruments available to regulate competition adds up to a coherent whole. I admit that the policy is not perfect. Indeed, my noble friend Lord Bruce-Gardyne asked me about the onus of proof. Yes, I take his point and certainly that is something which we ought to consider a little later. But our policy adds up to one of fairness.
I said earlier that the policy is not perhaps perfect and it is right that it should be subject to review. I have told the House on a number of occasions that my right honourable friend the Secretary of State intends to announce the terms of reference of a review of competition law and policy later this year. But I again say to your Lordships that the existing policy provides a sound basis for action in dealing with the many threats which can, and do, arise to the efficient operation of a competitive market, whether from restrictive agreements between firms, from abuse of existing monopoly positions or from proposed mergers which may create dominant positions. I believe I have demonstrated this evening that we have a policy and that it is a coherent policy. I admit that it has gaps and we hope to plug those gaps as a result of our review. I give that assurance.