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.

“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.”

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.

“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?)

“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.

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

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.

FINAL REPORT RECOMMENDATIONS ON VOLUNTARY AGREEMENTS (July 2011)

Chapter 5

5.13.  In general, the evidence supports the conclusion that non-regulatory or regulatory measures used in isolation are often not likely to be effective and that usually the most effective means of changing behaviour at a population level is to use a range of policy tools, both regulatory and non-regulatory. Given that many factors may influence behaviour, this conclusion is perhaps unsurprising.

5.14.  We welcome efforts by the Government to raise awareness within departments of the importance of understanding behaviour, and the potential this has for the development of more effective and efficient policies. We are concerned, however, that emphasising non-regulatory interventions will lead to policy decisions where the evidence for the effectiveness of other interventions in changing behaviour has not been considered. This would jeopardise the development of evidence-based, effective and cost-effective policies.

5.15.  We therefore urge ministers to ensure that policy makers are made aware of the evidence that non-regulatory measures are often not likely to be effective if used in isolation and that evidence regarding the whole range of policy interventions should be considered before they commit to using non-regulatory measures alone.

…..

5.25.  The involvement of other organisations to support the Government’s behaviour change initiatives may provide valuable opportunities to improve the effectiveness of behaviour change interventions, in particular by allowing a range of messengers to be used to deliver them. We welcome the Government’s intention to use such collaborations.

5.26.  However, we have major doubts about the effectiveness of voluntary agreements with commercial organisations, in particular where there are potential conflicts of interest. Where voluntary agreements are made, we recommend that the following principles should be applied in order to ensure that they achieve their purpose:

• The Government should specify clearly what they want businesses to do based on the evidence about how to change behaviour, and what steps they will take to achieve the same result if voluntary agreements are not forthcoming, or prove ineffective.
• Voluntary agreements should be rigorously and independently evaluated against measurable and time-limited outcomes.

5.27.  Given that these principles do not appear to have been applied consistently to the Public Health Responsibility Deal Network, we urge DH, in particular, to ensure that these principles are followed when negotiating further voluntary agreements. In relation to the current agreements, we recommend that DH should state for each pledge what outcomes are expected and when, and provide details of what steps they will take if the agreements are not effective at the end of the stated period.

SIGNIFICANT EXTRACTS FROM EVIDENCE TO THE SELECT COMMITTEE  

Pg 398 - “Professor Theresa Marteau: I’m not intimate with the Government’s policy on obesity, but my understanding is that, after the publication of the public health White Paper, there will be a separate report coming out in the spring. Part of it will be the responsibility deal that the Government are engaged in at the moment. Perhaps I could make a few comments about that. This is about government partnering with relevant industries for self-regulation. An interesting paper, which I will pass on to the Committee, is an analysis by Kelly Brownell in Yale of the history of self-regulation of the alcohol and tobacco industries. The paper compares that with marine fishing and forestry to try to see what we can learn about self-regulation for the food industry. In the analysis, the suggestion is that self-regulation has worked well for marine fishing and forestry because the threat is internal. In effect, if those industries don’t regulate themselves, they’ll have no industry. Where the threat is external, which is what the paper believes has been the case with alcohol and tobacco, and probably with food as well, self-regulation hasn’t necessarily worked so well. The report makes recommendations for how self-regulation by the food industry can be made to be most effective. It will come as no surprise to you that the emphasis is on the importance of transparency, objective evaluation and realistic goals.”

Also see pages 454-7 f0r evidence from ASDA.

Source: http://www.parliament.uk/documents/lords-committees/science-technology/behaviourchange/BCOralandWrittenEvCompiled180711.pdf

We are writing in response to ‘A competition regime for growth – A consultation on options for reform’ consultation questions: “Q.2 The Government seeks your views on the potential creation of a single Competition and Markets Authority (CMA); Q.19 The Government seeks your views on appropriate objectives for the CMA and whether these should be embedded in statute; and Q.20 The Government see your views on whether the CMA should have a clear principal competition focus.

We welcome the proposals for a new CMA. We believe it is vitally important that public interest factors are explicitly integrated into the objectives of the CMA, as was the intention of the previous competition regime. A new business unit with the specialist skills to balance public interest factors, supported by guidance, tools and ways of working with other government departments, should be a core objective and function of the new CMA – potentially embedded in statute. The advantages and disadvantages of this unit’s recommendations being approved by a minister or an official should be further examined.

The CMA should focus on competition, but also have the capability as described to balance public interest factors, particularly in the case of sector wide voluntary or co-regulated agreements where positive social and environmental impact could be gained. The new approach should build on: the Office of Fair Trading’s (OFT’s) 2009/10 research in this area; balancing of public interest factors achieved by other UK and international regulators; and the OFT’s existing experience in approving ‘consumer codes’.

We welcome the Prime Minister’s commitment to deal with this problem last December and urge all stakeholders to continue to work together towards a rapid resolution of the issues. The Prime Minister’s commitment was in response to a Business in the Community consultation of 500+ businesses which identified this area as warranting further investigation in order to scale up business engagement in communities. The approach set out above would also provide the certainty that greater investment in the UK demands. Investors will know that they can secure the comfort needed before they make long-term investments in areas where self-regulation/ collaboration on environmental and social issues is required.

In response to the Prime Minister’s call last December, Business in the Community and The Cooperatition Incubator look forward to continuing to work in partnership with the Department for Business, Innovation & Skills and the Office of Fair Trading in the months ahead to better understand and resolve this barrier to business action on social and environmental issues.

Yours sincerely,

Charlotte Turner, Director of Research, Business in the Community – www.bitc.org.uk
Andrew Dakers and Tom Linton, The Cooperatition Incubator – www.cooperatition.org

Consultation document: A competition regime for growth – A consultation on options for reform

Since 2008 Business in the Community and The Cooperatition Incubator have been actively researching – with the input of a number of experts – the competition law barriers to companies collaborating through voluntary agreements/standards to internalise the often substantial external social and environmental costs of doing business.   As Andrew Dakers’ article last Friday on The Guardian Sustainable Business Blog explained, given the huge reliance today on self-regulation, this is now more important than ever.

THE PROBLEM

Unfortunately cases such as the Dairy investigation and Laundry detergents have seen companies, trying to do the right thing by society and the environment, fined many tens of millions. Clearly the system needs to be fixed.   We believe resolving this problem is an integral part of shaping a responsible marketplace as we rebuild and strengthen the British economy.

In the past 12 months the problem has been recognised by Robert Peston (BBC), Jason Clay (WWF US) and the British Prime Minister David Cameron.   Work is now underway between the Department for Business, Innovation and Skills (BIS), Business in the Community (BITC) and the Office of Fair Trading to unpack and resolve the problem – but we still need your support to ensure the necessary changes are implemented.

A WAY FORWARD

Breaking down the competition law barrier to scaling up responsible business practice comes down to resolving fundamental problems with regard to how the UK competition authorities and EU DG Competition presently interpret the legal framework.  We believe now is the time for a change in approach if degradation of our natural environment is to be stopped and social challenges, such as obesity and alcoholism, tackled head on by business, NGOs and government working together through co/self-regulatory frameworks.

To help support the campaign please send a short email to Duncan Lawson (Consumer and Competition Policy, Department of Business, Innovation and Skills): cma@bis.gsi.gov.uk by Monday 13 June 2011.

Your message could be short and simple – perhaps along the lines of:

“Dear Mr Lawson, I am writing in response to ‘A competition regime for growth – A consultation on options for reform’ consultation questions: “Q.2 The Government seeks your views on the potential creation of a single Competition and Markets Authority; Q.19 The Government seeks your views on appropriate objectives for the [Consumer & Markets Authority] CMA and whether these should be embedded in statute; and Q.20 The Government see your views on whether the CMA should have a clear principal competition focus.

“We welcome the proposals for a new CMA.  We believe it is vitally important that public interest factors are explicitly integrated into the objectives of the CMA, as was the intention of the previous competition regime. A new business unit specialised in balancing public interest factors, supported by guidance, tools and ways of working with other government departments should be a core objective of the new CMA – potentially embedded in statute.  This will provide the certainly that greater investment in the UK demands.  Investors will know that they can secure the comfort needed before they make long-term investments in areas where voluntary self-regulation/ collaboration on environmental and social issues is required.

“We welcome the Prime Minister’s commitment to deal with this problem last December and urge all stakeholders to continue to work together towards a rapid resolution of the issues.  The CMA should focus on competition, but also have the capability as described to balance public interest factors, particularly in the case of voluntary agreements.  This should build on: the Office of Fair Trading’s (OFT’s) 2009/10 research in this area; balancing of public interest factors achieved by other UK and international regulators; and the OFT’s existing experience in approving ‘consumer codes’.

Yours sincerely…”

We appreciate this request is very close to the deadline, but hope you can take five minutes out to send a short email.

Thank you for your support – and if we can clarify any aspects of our research conclusions, please do not hesitate to contact us.