The Cooperatition Incubator

The Government must develop a joined-up strategy to change the UK’s unhealthy and environmentally damaging food system, as fears mount about global food security, MPs on the Commons Environmental Audit Committee warn.

Crucially the Environmental Audit Committee’s Sustainable Food report recommends that:
the Office of Fair Trading’s remit should be amended so supermarkets are not blocked from cooperating on sustainability initiatives.

The full report reads…

43. ‘Choice editing’ involves retailers limiting the range of products they make available to customers. Supermarkets, for example, might be able restrict the sale of produce with high environmental impact, for example, by reducing the numbers of some out-of-season and imported goods. The Food Ethics Council has argued that retailers pursuing choice editing strategies are likely to be at a competitive disadvantage. With the exception of a minority of businesses that position themselves specifically as leaders in the ‘ethical’ market, businesses that raise the prices of their products or reduce choice risk losing customers to their competitors. They concluded that, in the absence of regulatory intervention by Government, only a coordinated effort by the major businesses across a sector could get past this obstacle. By co-operating and adopting similar choice editing strategies, supermarkets would be able to reduce the risks of pursuing such strategies. However, such collaboration would potentially contravene competition law and expose those involved to challenge by the Office of Fair Trading or by the European Commission. And any regulatory regime with similar aims could also be construed as interference with EU Single Market rules. This barrier would also apply to public procurement through Government Buying Standards (paragraph 45). The Food and Drink Federation’s preferred approach was therefore for industry to continue its efforts to make its products as healthy and sustainable as possible, while offering consumers appropriate choices.81 When we raised this issue with the Minister, he regarded this as primarily an issue for industry to judge:

I recognise that the supermarkets are extremely nervous about competition law. … We do have periodic meetings with the senior chief executives of the supermarkets, but it is on a very clear agenda that makes sure that … we can’t talk about price or anything that could be construed as collusion. I can see the argument that they would be very nervous of it, yes. You would need to ask a lawyer whether in reality there is something in competition law that says they should not work together on sustainability. I don’t know. That would be for a lawyer to judge, but I am very conscious of their sensitivity over anything like that.

44. In March 2012, the Government announced proposals to create a new Competition and Markets Authority that would bring the Competition Commission and the OFT’s competition functions into a single organisation. The Government should amend the Office of Fair Trading’s remit to take account of sustainable development while protecting competition, and task the OFT and the Competition & Markets Authority to investigate and clarify the scope for supermarkets to cooperate in developing shared sustainability good practice.

The Enterprise and Regulatory Reform Bill will:

• Overhaul the employment tribunal system, and transform the dispute resolution landscape.
• Improve the effectiveness and efficiency of competition enforcement and the competitiveness of markets, by strengthening the regime and improving the speed and predictability for business.
• Set the purpose of the UK Green Investment Bank and ensure its independence.
• Strengthen the framework for setting directors’ pay by introducing binding votes.
• Extend the Primary Authority scheme, reduce inspection burdens on business and strengthen the legal framework for sunset clauses on regulation.
• Repeal unnecessary legislation, cutting the burden on business and citizens.

The Cooperatition Incubator and our partners will review the draft legislation closely in the month’s ahead to ensure that  public interest factors are fully addressed.

The Government has announced its response to the competition regulation regime consultation in A Stronger Markets Regime, published today.  Key extracts relevant to the work of The Cooperatition Incubator are:

• pg 6 – Opinion on proposals to enable the CMA to provide independent reports to Government on public interest issues was divided. The Government has decided that the Secretary of State will have the power to request the CMA to investigate public interest issues alongside competition issues as this can put the competition regime at the heart of inquiries currently undertaken by ad hoc ‘commissions’. This approach is designed to enable faster implementation of competition remedies than an ad hoc inquiry. This will also bring the public interest markets regime in line with the public interest mergers regime where CC panels can be required to consider certain public interest issues alongside competition issues.
• pg. 27 – The Secretary of State will have the power to request the CMA to investigate public interest issues alongside competition issues. 
• pg 30 – CMA reports to Government on competition and public interest issues 

RELEVANT EXTRACTS IN FULL…

Summary of Responses
4.10
The Secretary of State currently has the power to ‘call in’ market inquiries that affect defined public interests. In these cases, the CC reports to the Secretary of State on its findings on the competition issue but does not consider the public interest. The Secretary of State must accept the CC’s competition findings but has the power to decide on remedies in light of his own views of the public interest. Opinion on proposals to enable the CMA to provide a report to Government on public interest issues alongside competition issues was divided. Some respondents were attracted to the proposal as it would enable the Secretary of State to consider recommendations from experts on the relevant public interest issue under consideration. Other respondents considered such powers could dilute the CMA’s primary competition function and politicise it. A minority of respondents argued that the CMA will lack the appropriate expertise.

The Government’s Decision
4.11
The Government has decided that the Secretary of State will have the power to request the CMA to investigate public interest issues alongside competition issues at phase 2. By utilising the expert competition knowledge of the CMA and supplementing this with specialist public interest expertise to consider, holistically, competition and public interest issues, the Government considers this can put the competition regime at the heart of market inquires currently undertaken by ad hoc ‘commissions’. This approach is designed to enable faster implementation of competition remedies than an ad hoc inquiry.

4.12
This will bring the public interest markets regime in line with the public interest mergers regime where CC panels can be required to consider certain public interest issues alongside competition issues. The merger regime does not provide for the appointment of further public interest experts for this purpose, but the Government considers that such experts may need to be appointed to advise on public interest matters in market investigations because the issues in these can be wider than in merger inquiries.

4.13
The Government is committed to preserving the independence of the CMA and wants to ensure that it retains a strong focus on competition. The Government believes that appropriate checks will preserve the independence of the CMA and guard against excessive use. Specifically:

• The scope of public interest issues that may be considered in a markets case is not being widened by this reform. An affirmative Order from Parliament will be required to add a new public interest consideration to the current list (national security is currently the only public interest consideration specified in the markets regime).
• As now, the competition test will need to be met for the CMA to be able to carry out a market investigation.
• The role of the public interest experts will be limited to providing advice on the public interest issue under consideration.
• The Secretary of State will retain his current decision-making role on remedies where he considers the public interest consideration affects these.

On 26 October 2011 the Environmental Audit Committee discussed barriers to co-operation among supermarkets:

Q246 Katy Clark: The Food Ethics Council said that competition law may be preventing co-operation among the major supermarkets to use their buying power to support more sustainable products being developed. Do you recognise that as a problem?

Jane Bevis: Certainly in terms of their impact on the supply chain, supermarkets do need to be very cognisant of competition law and be careful about the way they go about things. In areas where they have relatively little influence, then coming together and agreeing with other partners in the supply chain that there is a better way of doing things and moving forward so that everybody feels this is a win-win situation, you can still make progress, but yes, there will be times where they feel they can’t come together to do something precisely because they would risk being in breach of competition law.

Bob Gordon: I would just add that I sit on the steering group of the Product Research Forum with a number of retailers, brands, WRAP and Defra. We talk very openly about what the issues are, what potential opportunities there are, and we talk about that in a pre-competitive context, so we are understanding the context and then, if any voluntary commitment is established as a result of those conversations, the individual businesses that sign up to that commitment will compete vigorously to achieve it in a way that not only gets them to achieve those sustainability goals, but also improves their market share.

[Ed - The key word in Bob Gordon's analysis is "if".  As a result of competition law regulation too many agreements are being scuppered.]

On 7 December 2011 this issue was further explored by the Environmental Audit Committee:

Q362 Zac Goldsmith: The Food Ethics Council-I am just checking it was them-has said the competition law could be preventing co-operation between the supermarkets in relation to pursuing sustainable food consumption. Is that a problem that you recognise?

Mr Paice: I recognise that the supermarkets are extremely nervous about competition law. You may be aware that a few years ago most of the major supermarkets were fined pretty heftily by the OFT for collusion on the issue of milk prices. It is not for me to judge the rights and wrongs of the case, but that is what has happened, and a consequence of that is that they are extremely wary about even being in the same room together. We do have periodic meetings with the senior chief executives of the supermarkets, but it is on a very clear agenda that makes sure that there is nothing-we can’t talk about price or anything that could be construed as collusion. I can see the argument that they would be very nervous of it, yes. You would need to ask a lawyer whether in reality there is something in competition law that says they should not work together on sustainability. I don’t know. That would be for a lawyer to judge, but I am very conscious of their sensitivity over anything like that.

Writing in The Guardian on 28 December 2011, Patrick Wintour  identifies competition law as an area where consensus in the coalition could drive reform:

“Jesse Norman’s latest attack on crony capitalism shows there is a thirst for action amongst influential thinkers on the Tory benches. He says of the two distinguishing features of crony capitalism: “Business action loses any relation to the wider public interest and business reward is separated from business merit. Crony capitalism is what happens when the constraints of law and markets and culture cease to be effective. Entrepreneurship and value creation are replaced by rent-seeking, and certain groups become enormously wealthy without taking risks.”

“Norman argues that this makes for a less efficient and unbalanced economy. This could be the big domestic political dispute of 2012. Conservatives in this camp believe Cameron can pull off an intellectual heist by presenting himself as the man to rescue Britain from the predatory crony capitalism that Labour had allowed to develop.

“Their argument is that crony capitalism really took root in the late 1990s when the Bank of England ceased to be responsible for systemic risk in financial markets, the doctrine of inflation targeting was institutionalised, and the banks were allowed to ramp up borrowing. All this occurred under a Labour government, 10 years after the sudden deregulation of financial markets under Thatcher that was known as Big Bang.

“Under this argument, issues such as corporate governance, tackling short-termism among investors, rethinking competition law and building strong regions around new democratic institutions such as city mayors will come to the fore. They will be the building blocks for economic growth.

“There is an appetite for this agenda across the coalition. Ed Miliband’s half-formed outburst against predatory capitalism could be wrested from him and become the new consensus. Politics is that fast and cruel.”

INTRODUCTION
When a business seeks to implement an ethical change in what it is doing (where ‘ethical’ connotes some public policy/sustainability objective) then there will be some different types of economic impact that it will experience. In summary some key elements of these delineations include:

1. Win-win versus non-win-win (i.e. whether, at the same time as the public policy objective ‘wins’, the business(es) and consumers can also do so, or whether consumers and possibly the business(es) will be out of pocket).
2. Within non-win-win (which implies that consumers will now be paying more for their products), those situations where businesses can keep their profit margins intact versus those situations where those profit margins dip.

WIN-WIN VERSUS NON-WIN-WIN SITUATIONS
Win-win situations are on the face of it straightforward for business as ethical and profit considerations are aligned.   We would argue this is where most progress has been made by voluntary Corporate Responsibility initiatives over the past 25 years.

However, situations that are win-win in the long-term may be non-win-win the short-term. This creates a tension between the interests of those involved in the business (investors and employees) on long-term versus short-term bases.

There may also be a necessity for joint research by businesses to achieve the public policy objectives on a win-win basis (which if not handled carefully could come up against competition law information exchange restrictions).

ELASTICITY WITHIN NON-WIN-WIN SITUATIONS
Non-win-win situations are less straightforward than win-win ones. This is because it may or may not be possible for businesses to pass costs onto consumers, depending upon considerations of the price elasticity of demand. We need to consider two situations:

• In some situations (where there is ‘price inelasticity of demand’ (for example for absolute essentials such as mains water or insulin for diabetics (ignoring NHS provision effects here) and other examples, noting the ranges for elastic and inelastic businesses can pass on costs to consumers without consumption dropping and profits thereby being dented. So business, if acting together across a market sector for public policy objectives (enabled through much clearer support from the competition authorities), will have the ability to pass on price increases without their businesses suffering. This means that they will require little or no additional incentive to make such changes.
• In other situations (‘price elasticity of demand’: leisure air travel, spirits, coca-cola, cars (see the list above)) businesses are likely to have trouble passing on costs to consumers. For example for leisure air travel, price elasticity of demand means that if prices are increased then people will curb their holiday plans. So business comes out a loser – which means voluntary agreements likely to have a less favourable reception. Furthermore competition law as it is presently regulated in the UK and EU would be a barrier to the collaboration.

It is for this reason that in such circumstances co-regulation would be necessary – either from traditional regulatory sources, or increasingly from e-democratic/internet-based mechanisms.   Changes in the regulation of competition law will be required, as well as either pressure from above (government promoting a co-regulatory initiative) or perhaps e-democracy (see below).  There are other levers of change too (e.g. media/NGOs) but these are potentially less significant.  The media/NGOs could of course be important contributors to future platforms for e-democracy.

OVERALL IMPACTS OF SUCH INITIATIVES
Of course, the overall effect of our thinking is the internalisation of externalities throughout the economy, which means a ‘bad news message’ for the economy overall – certainly if you are looking at things in a short-term, profit-based manner. Similarly this is a ‘bad news message’ for any area or nation that has previously had the ability to externalise costs to other areas or nations.

However, our thinking is a ‘good news message’ inasmuch as it represents the emergence of an economy with the facility to prioritise in a balanced way objectives of all kinds. Furthermore, although the project outlined here can be seen in isolation as one entailing overall the internalisation of externalities and therefore decreasing global productivity, the picture is different when one factors-in ongoing technological advancement and innovation (including that enabled by information technology (IT) that allows much of the change we advocate) and the resulting growth. With that wider picture then the outlook can still be for growth, just in a newly responsible fashion.

Notes

1) It is worth pointing out the implausibility that all positive social and environmental agendas in life might correlate to positive profit outcomes, amongst all the other possibilities. Therefore there will have to be a balancing between profit and other objectives in numerous areas.

2) It seems likely that trends would emerge: for example essentials would be less affected by the introduction of the mechanisms we suggest than (short life) luxuries.

3) Elasticity considerations tie in very powerfully with market definition. The first thing any businesses need to do when thinking about a voluntary agreement is think about who they need to reach agreement with (this essentially should identify/deal with problems of elasticity before it arises). In particular, if they do not have enough market players at the table then any agreement they make is going to run the risk of driving their customers away to nearby products/services. Consider this list of determinants when thinking about these questions.

4) It may be beneficial for markets to work together if they currently share the same environmental/social harm or can achieve the same benefit.

Researched by Tom Linton and edited by Andrew Dakers.

The final report of the Open Planet Economy Network “OPEN EU Action Plan for EU and EU National Governments” in October 2011 included the recommendation that:

“In accordance with existing EU Court case law, DGComp should launch a specialist unit to assess the public benefit of voluntary agreements that enable organisations to take collaborative action to internalise external social & environmental costs.  When the benefits of such cooperation agreements that cross-European national boundaries outweigh the costs of reduced competition the agreements should be formally authorised by DG Comp.”

BACKGROUND

The Cooperatition Incubator has worked closely with the OPEN:EU project over the past two years.  We believe the EUREAPA tool  provides a useful evidence base to inform and underpin future environmental voluntary agreements.  It breaks down territorial emissions into 57 GTAP sectors and 9 less detailed industry grouping (for example, agriculture, food manufacture, services). It breaks down consumption emissions into impact from consumption from the 57 GTAP sectors and 6 less detailed consumption themes (for example, food, transport, services).   Note however that the GTAP sectors are not detailed enough to assess the impact of individual products – only of a sector.

When users create scenarios themselves in the tool, they can change the total expenditure, the proportion of this expenditure on each consumption themes (e.g. food, transport) and also the proportion of expenditure on the more detailed sectors within each theme (e.g. meat, dairy, vegetables).

The scenarios the project team created were  constructed in the same way, with changes in consumption from each sector being estimated and used to calculate the corresponding reduction in environmental impact.  The scenarios were developed via a back-casting exercise on the basis of stakeholder input provided during a two-day workshop in September 2010. The four scenarios created were:

• Scenario 1 – Clever and caring – a future with a quality driven mindset towards development with dynamic technological innovation.
• Scenario 2 – Fast forward – a future with a quantity driven mindset towards development with dynamic technological innovation.
• Scenario 3 – Breaking point – a future with a quantity driven mindset towards development with technological stagnation.
• Scenario 4 – Slow motion – a future with a quality driven mindset towards development with technological stagnation.

The majority of the scenarios include policy interventions to internalise the cost of environmental harm, but there is not detailed analysis of the impact of this on business competitiveness. OPEN:EU discuss the high level business strategy likely to prevail in the narratives, but do not quantitatively analyse the cost implications of the scenarios.  This was outside the scope of the current project.

The final OPEN:EU quantification report leads us to the plain fact that we are all in this together and that simply working on a domestic approach (e.g. national or European) is not enough. All of these options also need to be replicated outside of the EU.

OUR REFLECTIONS

The focus of the EUREAPA tool/project is strongly on consumption and production efficiency.  This seems to leave very little room for ‘substitution’ – where, for example, one chemical input is substituted for a slightly more expensive one that is much more environmentally friendly.

In terms of the EUREAPA tool (providing scenarios on different sectors) it is useful in terms of providing information around environmental cost ‘per unit’ of that sector’s output.

The trouble with EUREAPA is that it does not seem to give much by way of solutions. Specific mechanisms are needed beyond just cutting consumption.

It’s not a viable solution just to say that only a certain amount, say, of perfume can be produced/purchased.  It seems like an extreme example of non-free-market behaviour, akin to the prohibition?

What is needed are ways of internalising the externalities through regulation or self-/co-regulation. Doing it that way means policy makers are not telling people they can not produce something, only that if they do then they will have to meet certain standards.

EUREAPA data will help target the most important areas.  What EUREAPA will not do is help target the most important areas where there are also good fixes that ‘substitution’-type solutions (which are clearly going to be more popular) instead of reduction-in-consumption-type solutions (gloomier). That additional research is important, because if we can get close to One Planet Living that way then it would be good to avoid too many drops in consumption (though of course they will be needed).

Of course, the GTAP sectors are obviously far wider than the ‘markets’ that stakeholders will ultimately be interested developing new voluntary agreements to cover.

(To check: Do EUREAPA sectors overlap? (e.g. food will incorporate transport costs). Perhaps SEI have somehow made them independent?)

COMMUNICATION FROM THE COMMISSION TO THE EUROPEAN  PARLIAMENT, THE COUNCIL, THE EUROPEAN ECONOMIC AND SOCIAL COMMITTEE AND THE COMMITTEE OF THE REGIONS  - A renewed EU strategy 2011-14 for Corporate Social Responsibility, October 2011 (pg 9-10)
“Enterprises often participate in self- or co-regulation processes, for example sector-wide codes of conduct on societal issues relevant to the sector in question. When such processes are designed in an appropriate way they can earn stakeholder support and be an effective means of ensuring responsible business conduct. Self and co-regulation are acknowledged by the EU as a part of the better regulation agenda.*

“Experience suggests that self and co-regulation processes are most effective when they: are based on an initial open analysis of the issues with all concerned stakeholders, in the presence of and if necessary convened by public authorities such as the European Commission; result, in a subsequent phase, in clear commitments from all concerned stakeholders, with performance indicators; provide for objective monitoring mechanisms, performance review and the possibility of improving commitments as needed; and include an effective accountability mechanism for dealing with complaints regarding non-compliance.

“The Commission intends to:
5. Launch a process in 2012 with enterprises and other stakeholders to develop a code of good practice for self- and co-regulation exercises, which should improve the effectiveness of the CSR process. ”

* See the Interinstitutional Agreement on better Law-making 2003/C 321/01, and

Commission Communication “Better Regulation for Growth and Jobs in the European

Union” COM(2005)97.

Unpublished letter to The Times newspaper

Dear Editor,

Whilst Alex Spence and Robert Lea (“Supermarkets fined over fix that raised dairy produce by 2p”, The Times, 11 August 2011) suggest Tescos response to the OFT’s recent judgement is extraordinary, the true problem lies in the bigger picture. Tesco are indeed right that the competition system needs reform by the coalition government. This is a process that is already underway and should take effect in a year or so.

Our research and campaign of the past three years has highlighted that the OFT presently appears to be unable to integrate public interest factors into their analysis and decisions – even though this was the original intent of parliamentarians introducing competition law reform back in 1997/8. Whether the supermarkets acted collectively or unilaterally to increase prices at the farm gate, the reality is that UK dairy farmers were demanding price increases to survive and they had broad public support for a fairer deal.

It is now vital that new competition legislation provides a framework for the OFT’s successor body to balance public interest factors, supported by guidance, tools and ways of working with government departments expert in specific areas. There is now support for change from the Prime Minister and across the party political spectrum. The Food Ethics Council rightly say: “The UK government should work with the OFT and consumer groups to develop publicly accountable mechanisms whereby businesses can collaborate to make progress on sustainability that is in the public interest.” Without this action, improved coregulation and responsible business practice will continue to be stiffled.

Yours sincerely,

Andrew Dakers
Founder, The Cooperatition Incubator – www.cooperatition.org

Two recent pieces of media coverage questioning the effectiveness of the present design of Responsibility Deals/ voluntary agreements are worth reading.

A story that headlined the Daily Mail on 1 August 2011 revealed how the usage of plastic bags has once again start to rise despite the WRAP-coordinated Responsibility Deal.  In follow-up Marks & Spencer acknowledged on 9 August that charging for plastic bags was the only effective way of tackling the problem.  However as our Plastic Bags case study explains, under the present competition law framework supermarkets can only co-ordinate on charges, and their timing, if an exception is made by the Competition Minister at BIS.   The 2008 Defra-led Impact Assessment (see pages 103-4) sets out why the Competition minister needs to use his powers.  Alternatively legislation will be required, which would miss out on benefits available through business cooperation, such as increased flexibility of solutions and drawing more fully on businesses’ on-the-ground knowledge.

In the same week, criticism has also been mounted in the BBC’s Panorama programme ‘Dying for a drink’ regarding the effectiveness of the Public Health Responsibility Deal and government advisory groups.  Again many of the complaints come back to pricing controls and the present inability of the coregulatory initiative to use this tool.