HL Deb 19 December 2002 vol 642 cc848-53

3.39 p.m.

The Parliamentary Under-Secretary of State, Department of Trade and Industry (Lord Sainsbury of Turville) rose to move, That the draft order laid before the House on 21st November be approved [3rd Report from the Joint Committee].

The noble Lord said: My Lords, we are here to consider the proposal to revoke one of the beer orders—the Supply of Beer (Tied Estate)(Revocation) Order. However, I should make clear at the outset that, in addition to the Supply of Beer (Tied Estate)(Revocation) Order, we intend to make a related order to revoke the other remaining beer order—the Supply of Beer (Loan Ties, Licensed Premises and Wholesale Prices) Order—which will be subject to the negative resolution procedure. While the parliamentary procedure for each is different, the two orders are linked and my speech will inevitably embrace both.

The central point I want to make straightaway is that the beer orders are simply no longer relevant to today's industry, so we are simply getting rid of unnecessary legislation.

The beer orders were radical and necessary in their time, but that was in 1989 when the landscape in the brewing and pubs industry was completely different. It may be helpful if I explain the history of the beer orders.

As long ago as 1986, the Monopolies and Mergers Commission was asked to investigate the possible existence of a monopoly situation in the supply of beer for retail sale on licensed premises in the UK.

As I said, in 1986 the structure of the brewing industry was completely different. At that time the industry was dominated by six major brewers which between them owned three-quarters of all tied public houses. The retail pub chains that populate our high streets these days had not even been thought of in 1986.

The MMC report described the stranglehold of the major breweries over the great majority of pubs in this country. Consumer choice was severely limited and independent producers and wholesalers were denied access to thousands of retail outlets. As a result, both wholesale and retail prices were higher than they needed to be.

The Government's response to the MMC's recommendations was the beer orders. There were two: the Supply of Beer (Tied Estates) Order 1989 and the Supply of Beer (Loan Ties, Licensed Premises and Wholesale Prices) Order 1989. The Government decided to require brewers owning more than 2,000 pubs to release from the tie half the surplus over 2,000, thus creating some 11,000 more free houses. Moreover, all national brewers had to allow their publicans complete freedom to buy non-beer drinks from any source and to sell at least one draught cask-conditioned "guest beer". The tied estate order was amended in 1997 to extend the guest beer provision to include one bottle-conditioned guest beer.

It is useful to say more about the guest beer provision because it is probably the only provision of the beer orders to have become lodged in the beer drinker's consciousness. It is important to consider it in context. It was one element of two statutory instruments whose overall impact was to widen the free trade by greatly increasing the number of retail outlets not tied to any brewer. They reduced the number of pubs controlled by the largest brewers, whether managed or tenanted. In the case of tenanted pubs, the guest beer provision further weakened the tie by empowering a particular category of publican to retail an additional beer from outside sources. In practice, the indirect beneficiaries proved to be the regional brewers and some independents and microbrewers who, for the first time, were able to offer their cask beers for sale within the tied estates of the larger brewers. The potential market for their products was widened considerably.

It is also interesting to note that, beyond the strict, legal provision requiring the large brewers to permit their tied tenants to purchase and sell a guest beer, the wider concept of offering a guest beer has been taken up voluntarily in other parts of the industry, for example, by the regional brewers and the retail pub companies. Since last year's sale of Whitbread's few remaining tied tenanted pubs, no pubs have had formal guest beer rights as defined in the beer orders. All guest beers currently on offer in British pubs are those being offered on a voluntary basis. I suspect that that is the reason for the general concept of guest beers being so firmly entrenched in the beer-drinking public's collective mind.

I return briefly to the opportunities which the guest beer provision of the beer orders offered to independent and microbrewers in 1989. While many independents withdrew from brewing, microbrewers have become more numerous, but, as with small businesses, they have both high start-up and failure rates, and their collective market share has only ever been tiny.

My honourable friend the Parliamentary Under-Secretary of State for Competition, Consumers and Markets was therefore pleased to announce on 19th February that the Government are keen to enhance the contribution made by the UK's small brewing industry to the diversity and competitiveness of the beer market. Actions speak louder than words, and my right honourable friend the Chancellor announced in Budget 2002 his intention to introduce reduced rates of duty on beer produced by smaller brewers from June this year. The small breweries relief scheme benefits over 370 breweries that produce around 2 per cent of beer for the UK market. The relief helps small breweries to compete more effectively with the larger breweries, and also benefits the wider economy, particularly in rural areas where many small breweries are located.

The Director-General of Fair Trading's review of the beer orders in 2000 was long overdue in the sense that it had been clear for some time that the market had changed dramatically. There have been considerable structural changes in both the brewing and pub retailing sectors. There have also been a number of significant mergers among brewers. Retail pub chains have developed and now own more than a third of the UK's pubs, offering countervailing buyer power in relation to the large brewers.

The Director-General of Fair Trading found that the declining market for beer in the UK since 1989 had forced the consolidation of both larger brewers and regional and local brewers. Apart from micro-brewing, entry into UK brewing has been limited, and there continue to be significant barriers to entry or expansion.

However, the most significant changes have been to the structure of retail ownership. That has changed dramatically, with the emergence of retail pub chains. At the same time, the retail on-trade market has become significantly more differentiated with pubs increasingly competing alongside clubs, bars and, to some degree, restaurants. Retail competition has been manifest in higher levels of capital expenditure on amenity and greater service provision. At the same time, consumers have a greater choice of different price/amenity combinations with the emergence of low-priced retail pub chains.

Not surprisingly, the Director-General of Fair Trading concluded that the beer orders were complex. He noted that there were many ways to amend them against the background of the need to keep competition healthy in the market. But he decided that the industry in its current shape was not suited to regulation by the beer orders as they stood. He therefore recommended that all provisions of the orders should be revoked except for three provisions of the loan ties order. Those were the provisions dealing with loan tie agreements, the publication of wholesale prices and the refusal to supply beer for resale.

My right honourable friend the former Secretary of State for Trade and Industry announced on 1st December 2000 that he was minded to accept all the Director-General of Fair Trading's recommendations, except that he also wanted to retain the guest beer provision and the rules preventing brewers from imposing conditions when they sell a pub to stop its being used as a pub in the future.

My right honourable friend made his announcement on the basis that the Director-General of Fair Trading's report noted that some 1,700 Whitbread pubs still had formal guest beer rights under the beer orders and he rightly wished to preserve the consumer choice that such rights bestowed. But soon after his announcement. Whitbread sold those pubs, leaving no pubs with formal guest beer rights. That put a completely different complexion on the matter and it made sense to consider afresh the Director-General of Fair Trading's report.

In the light of the Whitbread development, there is no point in retaining the guest beer provision. More broadly, the problems that the beer orders were introduced to address—the situation in which brewers could prevent proper competition between pubs and restrict consumer choice—no longer exist. That is why we have decided that the beer orders have served their purpose and should be revoked in their entirety.

To conclude, I emphasise that even if competition problems arise following the revocation of the beer orders, the Director-General of Fair Trading now has much stronger powers under the Competition Act 1998 than he had under the Fair Trading Act 1973. He has assured us that he stands ready to use those powers whenever evidence of anti-competitive behaviour comes to light.

The revocation order is a useful and sensible piece of deregulation. I hope that it will command enthusiasm, and I commend it to the House.

Moved, That the draft order laid before the House on 21st November be approved [3rd Report from the Joint Committee].—(Lord Sainsbury of Turville.)

Lord Hodgson of Astley Abbotts

My Lords, I thank the Minister for his explanation. As this is a separate piece or parliamentary business, I declare my interest as a non-executive director of a regional brewer that operates on a tenanted or managed basis about 1,500 public houses.

As I understand it, and as the Minister explained, this revocation order arises because the original beer orders no longer have any force. They applied to brewers and brewing groups that owned more than 2,000 pubs, but none of them any longer fulfils that condition. The Minister explained the background to the emergence of "pubcos" and the change in the retail trade, which we have been discussing during proceedings on the Licensing Bill.

In debate in Standing Committee in the other place, the Liberal Democrats seemed to get very excited about the impact of this revocation. Whatever the rights and wrongs or strengths and weaknesses of micro-brewers, regional brewers or national brewers, their relative position is not affected by the revocation, as no brewers fall within the provisions. I may be missing something; if I am, the Minister will, no doubt, enlighten me. Against that background, it is a deregulatory measure, and we support any measure of de-regulation.

I shall ask the Minister one question and draw his attention to one lacuna. The question concerns the parallel statutory instrument, which is to be revoked by the negative procedure. It is clear that the whole instrument is going. The Minister said that about three provisions remained and that, after the Whitbread sale, it was to be revoked in its entirety. Am I right in assuming that?

The lacuna relates to the impact of the progressive beer duty, to which the Minister referred, on small, family brewers. It has been brought to my attention that the progressive beer duty applies only to breweries that produce fewer than 30,000 hectolitres a year. That is the size of a micro-brewery. As I understand it, the European legislation permits a maximum of 200,000 hectolitres per annum. That ceiling is applied widely in European Union countries. The limit of 30,000 hectolitres is a significant barrier to growth in the micro-brewery sector. It has been calculated that a micro-brewery producing 30,000 hectolitres would have to produce 45,000 hectolitres —50 per cent more—to achieve the commercial return to compensate for the loss of the duty abatement.

There are, of course, revenue implications. As I understand it, the full cost, if the figure were to be raised to 200,000 hectolitres, would be about £3 million per annum. However, it might be worth the Minister's while to consider it, in the interests of stimulating economic activity and encouraging diversity and consumer choice—I have heard him speak of both from the Dispatch Box many times— especially given the £12 billion annual revenue From the sale of alcoholic drinks.

I look forward to hearing the Minister's comments. We support the proposal to revoke.

Lord Addington

My Lords, as has been said, some of my colleagues in another place got quite excited about the issue. Basically, they thought that we were getting rid of a system that had worked. I think that that was their attitude to the move. The Minister has made a convincing case that we are dealing with a change in culture, but I still appreciate the view expressed by my honourable friends that the system has worked as a long stop and to stop the problems from recurring. However, I shall not delay the House.

I want to support the Conservative Front Bench in their new-found Euro-enthusiasm with regard to micro-breweries. The suggested approach sounded sensible and, if it is a small loss to the Treasury, as the noble Lord, Lord Hodgson of Astley Abbotts, suggested, our palates might gain from greater diversity in our national alcoholic product. We could look forward to that. It is probably a matter for another day, but the noble Lord made a good point. Other than that, I have no strong objection to the order.

Lord Sainsbury of Turville

My Lords, I am thankful for the points made.

The noble Lord, Lord Hodgson of Astley Abbotts, is right: the move does not affect anyone. The concern expressed in the other place was that we might go hack to a situation in which a few brewers dominated the market. That is extremely unlikely, but, should it occur, the Director-General of Fair Trading has strong powers under the Competition Act 1998 to take action. The noble Lord is also right to say that all the beer orders will go. The final decision was that we should get rid of them in their entirety on the grounds of de-regulation.

As far as duty relief for small brewers is concerned, a judgment simply has to he made on the level at which it should be put. I believe that the view was taken that if brewers produce 200,000 hectolitres and have a turnover of £25 million they can no longer be said to be small brewers. In these particular circumstances, it is the small brewers that we want to help.

As I said, I believe that this is a sensible and useful piece of deregulation. I am pleased that it has the support of the House. I commend it to the House.

On Question, Motion agreed to.