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Mr. Waterson: Two hundred and sixty-nine.
Mr. Borrow: I stand corrected. It is certainly a major piece of legislation. I think that it will be possible to deal with it within the Government's proposed time scale, but it will be important for Ministers to be prepared to listen constructively to the comments on various clauses from different sides of the Standing Committee. Many hon. Members will have concerns about whether we have got the definitions right—particularly in relation to insolvency, and about the issue of whether someone is an honest or dishonest bankrupt. Having seen the Bill, there are certainly issues on which I would like to seek clarification before it reaches Third Reading.
6.9 pm
Dr. Vincent Cable (Twickenham): There is a great deal to agree with within the philosophy of the Bill. We fully endorse the principles of competition, of encouraging entrepreneurship and of strengthening consumer protection, as the Conservative spokesman did. There are also specific proposals with which we agree, such as political independence, the competition test, and the use of stop now orders to protect consumers. They represent admirable advances, though they will all need much clarification when the Bill is scrutinised. The point that was made about stop now orders shows the uncertainty that still hangs around, and I noted that the Secretary of State did not answer it, although I am sure that she will do so in Committee. Other elements of the Bill are attractive in principle, such as the bankruptcy reforms and the criminalisation of cartels, but they could fall victim to the law of unintended consequences. I agree with many of the reservations that have been expressed.
By way of introduction, I shall address what I think is the central logic of the Bill and what the Government are trying to achieve. The proposal is that we need to stimulate productivity growth, that the best way to do that is to have a more intensive and aggressive competition policy, and that the best way to achieve that is to import competition policy ideas from the United States. I do not disagree with the basic logic, but it is being massively hyped and exaggerated.
An enormous political investment is being put into the Bill that I suspect will not be realised. The Chancellor and his advisers, and perhaps the Secretary of State, have probably been to the United States and been star-struck by people such as Joel Klein, who introduced the innovative
competition policies during the Clinton Administration. They may have jumped to false conclusions about the ease with which those policies could be applied on this side of the Atlantic.I shall make a few points about the American system and the difficulties of applying it in this country. Their system is immensely litigious: ask any American business man about the problems of doing business in the United States. A speech about such problems in this country would be all about red tape, but in the United States it would be full of complaints about lawyers and tort costs. That is the fundamental problem with their system, and importing it uncritically here—adding a new layer of legal costs—would not help business, innovation and productivity.
I do not want to appear anti-American, because I am a great admirer of the way in which the American economy has performed, but we were in a similar state in relation to Japan 10 years ago. There was a Japanese economic miracle, and we were urged to copy everything that they were doing. A similar situation exists with the United States today, so a cautionary note should be sounded. Recent work suggests that productivity growth in the United States is almost certainly exaggerated by a factor of two, because of how national accounts in the US deal with depreciation in the rapid-growth computer industry. We should not get too carried away with the US experience.
We should also be aware of intellectual fashion. I am a little older than the hon. Member for Maldon and East Chelmsford (Mr. Whittingdale). In the 1970s, when I did my stint as a special adviser in the Department of Trade and taught economics students the principles of competition policy, the intellectual fashions were very different from those of today. There was a tremendous belief in economies of scale, large-scale firms and large-scale plants. Such ideas were seen as the way to productivity growth. We had the Industrial Reorganisation Corporation, mergers in the car industry, and the idea of national champions, to which the hon. Member for South Ribble (Mr. Borrow) referred.
In retrospect, we realise that that approach was probably not very smart, but at the time, there was consensus in politics and business that it was the way forward. In the 1980s, during the Reagan years, we drew on the Chicago school and the belief that we did not need a competition policy because excess profits bring new competition into the industry, provided that there are contestable markets. That idea prevailed for a while, and now we have a new fashion following the reforms in the United States in the 1990s.
However, as the Americans are discovering, the position is difficult. One of the big problems that they have, and that the Office of Fair Trading and the Competition Commission will have with our merger decisions, is striking a balance between competition and monopoly in high-technology activities. On Friday, I am bringing back my private Member's Bill, which has wide support. The principle behind intellectual property rights is that a monopoly is deliberately created in which innovation can develop.
The United States has had enormous problems getting to grips with the problems of Microsoft—the case is still bouncing around in the courts, for very good reasons. How do we deal with the balance of competition and
monopoly in such a case? The US Administration, despite their activist policy on monopoly, have still not determined how to deal with Microsoft. They have not tried to attack the underlying monopoly, which is the MS-DOS operating system. They have gone for the unbundling problem, which is a secondary issue. There is a genuine difficulty about how much competition should be allowed in the interests of innovation and growth.The United States policy is, in the Government's language, the gold standard, but there have been important changes in Europe. The European Union's competition policy has advanced considerably, and some of the toughest actions, such as those involving GE and Honeywell, have been taken by the EU. One of the concerns expressed by the Confederation of British Industry and the Law Society is that the Government are developing an American-based competition policy when the EU's own policy through the merger directive and the cartel legislation is developing independently.
I do not want to get into an argument about whether the American or European approach is best: they just happen to be different. From the point of view of British companies, it is important to have consistency. If the Government are not consistent and do not take into account the European trends, the legislation will get into trouble in the courts. We have seen that already with one or two key cases, such as the Interbrew case, in which the Competition Commission was humiliated by being overruled by the court. One of the key lines of Interbrew's defence was that British law and European practice were at odds. The Government must be careful, because uncritically adopting an American approach to competition policy when the European Union is trying to refine competition principles for the single market will produce some difficult inconsistencies.
I want now to address some of the specific points in the Bill, the first of which is on political independence. I think that we all agree that merger references should no longer be determined by Ministers. I had an open mind on that issue, until something that the Secretary of State's predecessor did finally persuaded me of the need to remove such decisions from the political world. The right hon. Member for Tyneside, North (Mr. Byers) made some excellent speeches on this subject, and strongly defended political independence until the NTL and Cable and Wireless case came along, which coincided with the interests of the Murdoch group. It was out of character, but he intervened, and although his motives may have been entirely innocent, it persuaded many people concerned with competition policy of the need for Ministers not to intervene politically, and not to be seen to be intervening. I support what the Government have now done.
We must bear in mind the need for checks and balances. I am not sure how many hon. Members realise that, under this legislation, it will no longer be possible for them to go along to the Secretary of State every time a merger takes place that threatens jobs in their constituency and ask her to do something about it. She will not be able to do anything. There is a radical change in that policy area, and checks and balances must be built in.
When the Bank of England was made independent of day-to-day political interference, checks and balances were provided, in the form of parliamentary accountability through the Select Committee on the Treasury. I was part
of that process, and it worked admirably. One of the key elements was confirmatory hearings. I would be interested to know why the Government have not proposed that in this area. Mr. Vickers and the four members of the OFT board are immensely powerful people, although Mr. Vickers is probably less powerful now that he has a board behind him. In their own way, they are just as powerful as the Monetary Policy Committee of the Bank of England. Their appointments should be vetted and scrutinised by Members of Parliament as a necessary part of the discipline. The same should apply to Mr. Derek Morris and the Competition Commission. That element of political accountability is missing from the legislation as it stands, and we would like more action taken on that front.The second element on which there is general consensus is the competition test. It is right that we should move away from the vague public interest test to a competition test. I am not entirely sure that the Government or the House have appreciated how radical that step will be, because as I understand the legislation, it will now become almost a matter of course for large mergers to be referred for examination. Almost by definition, a large merger reduces competition. Unless there are extenuating circumstances such as national security or palpable consumer benefits, or unless the companies involved are very small, there is no good reason why mergers should not be referred for examination. There is an irony here. A few years ago, the City called for the political independence of merger decisions because it did not like the interruption of merger processes by "Mrs. Blockit", as it described the then Secretary of State for Trade and Industry. It howled with pain and rage at the loss of its fee income, and asked politicians to keep out of the process.
Ironically, there will almost certainly be many more merger references, because mergers will infringe on competition, and because of the growing volume of evidence that they do not add value. Many studies have been undertaken, but according to the KPMG study that I saw a couple of days ago, half of all mergers subtract shareholder value, let alone anything else, and a third do no good whatsoever. There is no good reason, therefore, why the Office of Fair Trading should ever stand aside and not refer a merger. We are entering into a totally different culture, which the City will probably have to get used to, whereby mergers will be constantly referred and investigated much more actively. I welcome that, but the implications have probably not yet been thoroughly thought through.
I want to say a few words about a third issue—the criminalisation of cartels. I have no particular objection to that principle. It seems perfectly sensible that, if businesses behave in a very damaging and collusive way, their representatives should go to jail. Indeed, they already go to jail for offences such as fraud or the adulteration of meat. There is nothing particularly problematic about that.
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