1 thought on “An open letter to John Penrose MP on the Competition and Markets Authority”

  1. Posted 12/12/2020 at 09:50 | Permalink

    The author of this excellent letter is right to address it to John Penrose MP as he has been appointed by the Chancellor of the Exchequer to lead a review into the UK’s existing competition regime in the expectation that he will recommend how it can be enhanced in the context of Covid-19 and the end of the transition period.

    At the start of 2021, the Business Secretary will inherit repatriated powers on competition policy, the M&A control regime and antitrust enforcement role from the EU which will further widen his remit, to add to powers he already has to direct the Competition and Markets Authority to conduct investigations into the state of private markets.

    Not only should the CMA’s role be expanded to include government-provided services such as health and education, but government procurement should also be brought with its purview – given that central government spends £284bn of taxpayers’ money each year to purchase goods, services and labour (in the form of high-end consultancy) from the private sector, making it quite easily the single largest buyer in the UK.

    Competition is the essence of enterprise and free market capitalism. For an economic model that relies on voluntary exchange between buyers and sellers and seeks to deliver goods and services to everyone at a price they are willing to pay, vigorous competition among vendors on the basis of a level playing field is absolutely essential.

    In Adam Smith’s use, the “free market” is not a market free from government, but one that is free from rents – these rents include distortions borne of market power, privileged access and position. It is therefore heartening to know that senior members of this government, including the Prime Minister, are self-confessed free marketeers and are willing to go out of their way to praise the virtues of the market over the State at every opportunity.

    The central tenet of capitalism is that those participating in it do so in the expectation that they will profit from their own labour and initiative. Yet, the last several years has seen the widespread belief that individuals at the top of big business and corporate houses are benefiting at the expense of their customers, employees, supply chain partners, the local community and the environment.

    To this end, the subsidy-seeking, competition-averse businesses which are permanently on the hunt for taxpayer funds will resort to a whole host of devious means to persuade the governing elite to underwrite the highest category of risks associated with their business activities – by skewing public spending decisions in their favour.

    The post-second world war experience has repeatedly vindicated the view that the single most powerful driver of prosperity is profit-seeking businesses trading within a law-governed and competitive market environment. However, in the new millennium, the recently exposed frailties of capitalism are all too evident in markets in which the government is the main or only customer, which happen to be some the most closed in the world with significant barriers to entry. Indeed, such markets are more often than not, dominated by just a handful of players, the Select Few.

    It is hard not to conclude that this stranglehold by the Select Few has been the cause of poor performance and a lack of competitiveness – characterised by persistent delays, cost overruns and chronically weak export performance.

    The problem with markets in which the government is the main customer is that they are highly susceptible to cronyism – the nexus between the governing elite and the business elite that contrives to put the interests of business first, ahead of the wants, needs and expectations of ordinary citizens. Not least, because the twin evils of lobbying and corruption rear their ugly heads every time taxpayers’ money crosses the boundary between the public sector and the private sector.

    It is, as the economist Randall Holcombe puts in his book “Political Capitalism” a “system in which the economic and political elite cooperate for their mutual benefit.” The political elite tilt the economic playing field in favour of the economic elite, privileging them through subsidies, regulatory protections and targeted tax breaks. In exchange, the economic elite then help to ensure that the political elite remain in power. The rest of us pay the bill for this quid pro quo through higher taxes, higher prices, and a less efficient, less dynamic economy.

    Consider, for a moment, the market in defence equipment.

    When it comes to procuring defence equipment for the Armed Forces, the government has no option but to rely on the private sector, because it no longer has the ability to produce military equipment – as it used to do.

    Unlike the market in consumer goods and services, there is only one customer for defence equipment – the government. Consequently, the purchasing decisions taken by the government has a significant bearing upon the composition and diversity of players in the defence equipment market. And because taxpayers money is used by the government to procure military equipment for the Armed Forces, the condition of the defence equipment market should be of concern to anyone who has an interest in the proper functioning of open and free markets, and securing best value for money, as it relates to the expenditure of public funds.

    What has been clear for many years is that public subsidies handed out to defence equipment manufacturers over several decades is the reason why they have failed so miserably, to deliver equipment to the Armed Forces which is fit for purpose, adequately sustained in-service and constitutes value for money through-life.

    In the UK, as in many western countries, the means of defence production, distribution and exchange is exclusively in the hands of private interests, that is to say, the State is entirely dependent on for-profit organisations for the design, development, manufacture and delivery of new military equipment to the Armed Forces. Consequently, the government has no choice but to rely on the private sector for all its military equipment needs, including its subsequent upkeep, when in-service with the user. The harsh reality is that, no department of state in Whitehall is as dependent on the private sector, as is the Ministry of Defence – putting it at serious risk of capture by private interests (if it hasn’t already been) which allows them to bend policy to their will, as it relates to the expenditure of public funds. Equally, these private interests are entirely hooked on a steady flow of taxpayer funds for their very survival – no least, because they have not bothered to diversify at all.

    It may be that senior executives seconded from the defence industry and embedded within the Ministry of Defence, who remain in the pay of their employers, may have something to do with this skewing of spending decisions, to favour their narrow commercial interests – at the expense of taxpayers and the public interest.

    For those not familiar with this concept of state capture, Transparency International, the anti-corruption non-profit organisation, defines it as:

    “A situation where powerful individuals, institutions, companies or groups within or outside a country use corruption to shape a nation’s policies, legal environment and economy to benefit their own private interests”.

    History has consistently shown that protecting industries from competition sets them up for failure in the long run.

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