Philip Booth is Professor of Finance, Public Policy and Ethics at St. Mary’s University, Twickenham.
There is an old joke along the lines of “why is there only one monopolies’ commission?”. It is so lame, you won’t even see it in your Christmas cracker this year. However, there is an important point to it. When it comes to competition policy, the Government marks its own homework.
The UK’s Competition and Markets Authority (CMA) has immense powers, which it threatens to use with ever more vigour against tech firms. However, the biggest monopolies are in the provision of public services such as health and education.
In addition, many of the most important impediments to competition in the private sector come from the government in the form of regulations that restrict entry or load costs onto small businesses.
John Penrose MP is currently conducting a review of competition policy. Right at the top of his list should be competition in government-provided services and the way in which government itself, especially through regulation, impedes competition.
When it comes to public services, governments have to have a monopoly of some things – defence, penal systems, some aspects of policing and, it is worth adding in current times, certain genuine public health functions. However, experience in all these areas, especially recent experience in public health, demonstrates the limitations of state monopolies. As such, both Labour and Conservative governments have promoted school choice and also, with no discernible success, tried to promote competition in the provision of healthcare.
Just as governments of the left develop institutions designed to embed their reforms and make them difficult to reverse, supporters of competition and markets should do the same. This is especially so where competition relates to what we might regard as a natural right, such as that of a parent to choose a school for their child. Such a right is so fundamental to those of us who believe in a free society, that it needs protection in the wider political and institutional landscape.
Though most readers of this blog will probably not be supporters of the European Union, its policies in the areas of state aid and competition and public services did have some merit. They provided protection from the worst excesses of monopoly in some aspects of government service provision (though its effect was limited by the various legal exceptions).
There are two actions that the government should take. Firstly, CMA should be given a specific statutory duty to investigate impediments to competition arising from government action, especially in relation to government regulation. Crucially, such investigations should not have to relate to a specific market inquiry. For example, the CMA could examine the effect of land-use planning regulations on competition across a range of markets (education, childcare, retail etc) or the impact of GDPR regulations on the relative cost structure of small and large businesses. Secondly, it should have a like duty to scrutinise state monopolies.
Governments and barriers to entry
Regulation is such an effective bar to competition that it can be deliberately captured by incumbent businesses in order to frustrate market entry. Regulation may also be captured by the regulatory body itself which may discharge its functions by trying to reduce the risk of scandals within markets by writing ever-more regulation.
An uncosted side effect of regulation may well be to raise barriers to entry. Both market incumbents and their regulators are likely to have cognitive biases that lead them to favour regulatory solutions to problems within markets whilst ignoring the effects of competition.
Two examples are worth noting. The Financial Conduct Authority (FCA) has a statutory duty to promote competition and yet its very existence impedes competition. The process of authorisation for a new financial adviser can take six months or more and the FCA regulatory handbook has around 1,000 sections. This kind of regulation creates a significant advantage to incumbents and makes innovation especially difficult.
Although the FCA has a statutory duty to promote competition, its other objectives will always take precedence and the FCA is never held properly to account for its failure to promote competition.
A second example relates to occupational licensing. Currently, occupational licensing and certification covers 40 per cent of all employees. This figure has grown dramatically in recent years and is much higher than equivalent figures in, for example, Sweden and Denmark. There is widespread international evidence that occupational licensing damages consumers, reduces competition, and undermines social mobility.
However, though the CMA may examine a problem such as this as a minor aspect of a particular inquiry in relation to a specific market, the issue as a whole and its cumulative effects are ignored. The CMA therefore needs wide-ranging powers to investigate such government-imposed impediments to competition regardless of whether the investigation is related to a specific market inquiry.
In addition, the CMA should have a statutory duty to investigate markets where governments are monopoly providers.
The CMA has a statutory duty to “promote competition, both within and outside the UK, for the benefit of consumers”. Its mission is to “make markets work well in the interests of consumers, businesses and the economy”. It’s role and effectiveness in dealing with the impact of monopoly on people’s lives would be much more effective if these statutory duties were expanded to explicitly include the promotion of competition in relation to government-provided services, such as healthcare and education. Though current EU provisions in these areas will remain after Brexit, they will be toothless: the government would be marking its own homework.
Much government policy in recent years has involved the promotion of competition in education. This needs to be reinforced by providing families with the protection of competition law.
To begin with, parents or those establishing free schools in the case of education, or various interested parties in the case of healthcare, should be able to take enforceable action, backed up by competition law, where one government body or a layer of government is acting in a way which subverts the government’s own policy in relation to promoting competition in public services. For example, parents should be able to take action if local authorities obstruct the development of a free school. Such actions, if successful, could come with penalties imposed on the offending body.
There should also be a general obligation on the CMA to investigate situations where the government itself is restricting competition in the provision of services (for example by providing its own service free at the point of use).
Current government and CMA competition policy looks at the splinter in the private sector’s eye whilst ignoring the beam in the state’s eye. The Government needs to have a more robust policy and enforcement regime. This will counter-balance the tendency towards monopoly, protectionism and regulation that pervades governments and will ensure that a reforming government can embed its reforms more deeply in the institutional landscape.
It can ensure that we can benefit from competition where monopoly is most deeply embedded – in areas of the economy protected by government regulation and in the provision of government services.