Examination of Witnesses (Questions 420-439)
31 MARCH 2004
MS PENNY
BOYS, MR
ALAN WILLIAMS,
MR BOB
GADDES AND
MR COLIN
FARTHING
Q420 Mr Breed: Perhaps lastly on this
section, one of the other perceptions, and it often happens in
other aspects of policy as well, is that we here in the UK take
a more robust, perhaps some would even call it an extreme approach
to European legislation in certain areas, in this case in competition
law. Do you feel that you interpret EU competition law in precisely
the same way as other countries in the EU?
Ms Boys: I think it would be an
overstatement to say that we do so precisely in the same way but
it is very important and in fact it is written into the Acts under
which we are operating that we must be consistent with European
law and the change to which I briefly referred just now from 1
May when the European Commission decentralise to national competition
authorities some of their responsibilities for approving, exempting
or challenging agreements. There is a network of national competition
authorities in place which aims to ensure consistency of approach.
We have also always to have regard to European court cases and
the way European law is being interpreted throughout the community
and you will find that reflected in our competition decisions.
Where we have got relevant precedents in European law we normally
cite them.
Mr Williams: Looking at the two
European law competition prohibitions against anti-competitive
agreements and abuses of dominance, I have not seen any evidence
to suggest that we are interpreting these any differently from
anyone else.
Q421 Mr Breed: Finally on the abuse of
dominance, which I think was probably the aspect around which
the original investigation into the supermarkets centred, do you
find there is no abuse of dominance in terms of the purchasing
policies of current supermarkets in terms of milk?
Mr Williams: Just on a technical
point, the supermarkets inquiry was under the Fair Trading Act
and done by the Competition Commission; it was not done under
the Competition Act or under EC law. Secondly, to be dominant
a company has to have a fairly substantial market share. Not less
than 40% is a sort of rough guide and none of the supermarkets
do come close to that, so they are not really dominant in terms
of European law.
Q422 Mr Breed: No, but in respect of
the Competition Commission report it actually found there was
a complex monopoly, which actually meant that in terms of the
25% rule that did not necessarily apply. Therefore, in terms of
the abuse of the dominance of the supermarkets as a whole, in
terms of the complex monopoly to which they are party do you find
that they have abused such dominance?
Ms Boys: Well, we must let Colin
answer for the Competition Commission, I think. Alan is correctly
saying that in so far as we have applied the abuse of dominance
European law I do not think we have had a case involving the supermarkets.
Mr Williams: I am not aware of
any.
Mr Farthing: The supermarkets
report discussed all the evidence we received but the conclusion
we reached was that taking all of this evidence into consideration
we are satisfied that the industry is broadly competitive and
that overall excessive prices are not being charged nor excessive
profits being earned. So that was the view that we came to on
the supermarkets as a whole. As I think I mentioned earlier, we
carried out a review of the various categories of products that
the supermarkets sold and one of those categories was dairy products
and we found that overall (these are 1998/99 figures) the rate
of return across the whole piece that the supermarkets were making,
their gross margin, was 26.2% and in the dairy sector it was 25.7%.
Q423 Mr Breed: But you will be aware
of what the current figures are?
Mr Farthing: I do not know what
the current figures are. As I say, we just do individual inquiries,
but at the time when we looked at it that was the position.
Mr Breed: If you take off about 7 or
8 pence and you might be close to it. Okay. We can draw our own
conclusions for that.
Q424 Mr Jack: What is the definition
of "excessive"?
Mr Farthing: Well, disproportionate.
Q425 Mr Jack: Could you just give me
some numbers?
Mr Farthing: Well, as I say, the
gross margin which was being earned at the time was 26.2% and
that was deemed not to be excessive.
Mr Breed: It is even less excessive now.
Q426 Mr Jack: I just want to know what
you would have thought was an excessive margin.
Mr Farthing: We do not work that
way. We look at the evidence in front of us—
Q427 Mr Jack: But you must have a definition
if you are defining 26.2% as not excessive.
Mr Farthing: We take a view on
the industry in front of us, the sector, the relevant factors,
the rate of competition and in the light of all those factors
the view taken was that the levels were not excessive in the supermarket
industry at that time.
Q428 Mr Jack: In that case what was excessive?
You must be able to give me a numerical answer as to what is excessive.
Mr Farthing: Well, as I say, we
do not work that way round. Our job is—
Q429 Mr Jack: So you can say that 26.2%
is not excessive but you cannot give me a number to say what is
excessive?
Mr Farthing: I am not saying that
26.2 as a number is not excessive, I am saying that when the group
looked at this particular sector at that particular time they
took the view that the rate was not excessive. You asked me what
the number was in that case and I told you, but it does not mean
that we always regard 26.2 as not being excessive.
Q430 Mr Jack: But the reason why the
Committee is interested in that is that the data we have received
so far shows a falling farm gate price and a rising return to
retailers, which is why we are a bit sceptical about what you
have just said and really how up to date the information is because
we are trying to understand why it is the farmer seems to be getting
less and people at the other end of the chain seem to be getting
more. Have you got any thoughts on that?
Mr Farthing: As I say, I am not
pretending that this is up to date information. All that I can
tell you about it is the inquiries that we have carried out and
the last one we carried out into this area used data for 1998/1999
but yes, I agree it is four or five years out of date.
Q431 Chairman: Outside of an inquiry
where clearly these are controversial areas, do you continue to
do any ongoing research?
Mr Farthing: No.
Q432 Chairman: So once an inquiry is
finished, that is it?
Mr Farthing: That is right.
Q433 Chairman: So the fact that someone
may think—it is a bit like replaying a football match—that
they have got the wrong result, they can decide it in the next
game. But there is no next game.
Mr Farthing: Well, there may well
be a next game. If new concerns arise and the OFT decides they
want to refer them to us to look again then we will look again.
There are sectors where that has happened. But we do not initiate
any work ourselves. We do not either keep a sort of roving eye
over areas we have looked at in the past or decide ourselves that
we need to look at them again, but there is a mechanism which
is through the OFT for deciding that if concerns revive or if
new issues arise then there is always the option of making another
reference.
Q434 Paddy Tipping: We were talking a
moment or two ago about European competition law and you were
reminding us that it is closely aligned across the country and
I think Alan Williams said (I paraphrase and I may not have got
this quite right) that there was no evidence that it was interpreted
differently in the UK than elsewhere. You have seen the KPMG report.
There is a suggestion in the KPMG report that we are stricter
and more severe in the UK than elsewhere. What is your response
to that?
Mr Williams: The KPMG report specifically
identified one factor in the UK which was not present in other
European countries and that was the monopoly provisions of the
Fair Trading Act and that was really the only difference it identified.
There are a couple of points to be made there. First of all, the
Fair Trading Act is in effect no more: it has been replaced by
the Enterprise Act, and the public interest test which the KPMG
report was a bit exercised about in the Fair Trading Act has been
replaced by a straight competition test which Colin told you about
earlier, ie whether there are market features which prevent, restrict
or distort competition. So there is that change. The other change
which has come about is one which Penny has referred to, which
is that as from 1 May we will be directly enforcing Articles 81
and 82, the competition law provisions of the Treaty, and that
change will require us not to prohibit agreements which are permissible
under EC law. So that will further limit any scope for divergence
between the UK and other parts of Europe. My reference to the
fact that I do not believe we are enforcing the European law,
that is to say the Competition Act, any more harshly than anywhere
else—I did actually mean the equivalent UK law, that is
to say the Competition Act. There are other bits of the law, or
there were.
Mr Farthing: There was an argument
in relation to the Milk Marque inquiry, the one we did in 1999,
where Milk Marque and others claimed that there were special considerations
to do with the Common Agricultural Policy which made it inappropriate
to apply elements of competition law. So the group carrying out
the inquiry went to both the competition directorate and the agricultural
directorate in Brussels, DG4 and DG6, and put this argument to
them. The answer we got back was that the way in which the competition
authorities were operating in the UK was entirely consistent with
European law. They indicated areas where there would be difficulties
but said that none of the things that we did in relation to this
inquiry caused any difficulty. I think after we had finished there
was a subsequent court appeal which again went to the European
Courts of Justice, where again our view was upheld. So where this
has actually been tested the answer has been that we are not doing
anything which is incompatible with European law.
Q435 Paddy Tipping: Has anybody looked
at Arla and the way that the competition authorities in Denmark
looked at Arla and is your approach compatible with that?
Ms Boys: The only occasion on
which I think we have specifically looked at Arla was in the recent
takeover by Arla of Express. That was something which fell to
be considered first by the European Commission under the European
merger law but was then repatriated (as the phrase is) back to
the UK authorities because of the significance of that for the
UK market. We did think that there was the potential for possible
serious competition concerns there and we made the reference to
the Competition Commission, who reported in September last year.
Q436 Paddy Tipping: What about the situation
with Arla in Denmark then? Have you had a look at that?
Ms Boys: No, not specifically.
I imagine you are getting at the fact again that Arla, rather
like New Zealand, has a very large position within Denmark. I
think again one would need to look more carefully at the facts
than we have so far done, but I would imagine there would be features
about the Danish market, the amount of trade there is in liquid
milk there, whether the national boundary has any relevance at
all to the economic market which might have shaped what has happened
in Denmark.
Mr Williams: I do not know how
they got to their current position but it is very different from
ours. Essentially milk prices are regulated in Denmark.
Q437 Paddy Tipping: So this is competition
law aligned across Europe then, is it? If it is different in Denmark
and it is the same company, it does not sound as though competition
law is as closely aligned as we have been led to believe?
Mr Williams: No, that is a false
inference. The law is the same. There may not have been any agreement
to prohibit if Arla was that large at the time Denmark entered
the European Community. There would not have been any agreement
or any concentration to prohibit; it would have already been there.
Ms Boys: There would definitely
be, of course, different situations across Europe. We see that
wherever we go in Europe there are things that are different.
But the law and the application of the law is as uniform as we
can get it to different situations.
Q438 Paddy Tipping: I think we may want
to examine this a little further because it does seem to be the
case from the Arla example and other examples that there seems
to be more vertical integration in parts of the EU than there
is here. Penny, you were trying to explain to me why that was
the case. Give me another explanation. Try again because I am
finding this a bit hard.
Ms Boys: I do not think I can
realistically give you a good explanation of why, but what I can
say and what I am here for is to say that if there is a diagnosis
or a presumption on anyone's part that it is European competition
law which is inhibiting that, that is not so. That is the most
that I can legitimately say.
Q439 Paddy Tipping: Let me say something
legitimately as well, that you accept that there is greater vertical
integration in other parts of the EU?
Ms Boys: Absolutely, yes.
Chairman: We have already touched on
the supermarkets and we are going to look at the famous or infamous
code of practice, but just to lead into it I think it would be
useful for Colin to set the scene on where we are in regard to
producers and supermarkets.
| 
