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Privatisation and Competition
policy
You will require the handout on
Competition Policy to complete this worksheet. Click
here for a copy
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1)
Outline the main provisions of the 1998 Competion Act
(6 marks)
2)
Under what circumstances will other legislation be used to investigate
restrictive practices.
(2 marks)
3)
What is the Fair Trading Act 1973,
(2 marks)
4)
What is the role of the Competition Commission?
(4 marks)
5)
Why does the government seek to prevent collusive agreements between
firms? Illustrate you answer with a diagram.
(5 marks)
The article below is a press release
from the DTI on restrictive practices in the UK car industry.
1 August 2000
BYERS ACTS TO REDUCE CAR PRICES
Measures to cut the average price of a car by £1,100 and save private
car buyers around £1 billion a year will come into force from next
month, Trade and Industry Secretary Stephen Byers announced today.
A new legal Order being tabled today will bring about greater
competition in the supply and sale of cars.
All the provisions of the Order will come into force on 1 September,
the date of the next number plate change. Suppliers must make their
first offer of volume-related discounts to dealers within three
months of that date.
Mr Byers said:
"These moves will mean a better deal for car buyers.
"A new car is the second most expensive purchase for most private
buyers. In their report the Competition Commission found that buyers
are paying about 10% - or £1,100 - too much for their cars. The
Director General of Fair Trading estimated that private car buyers
could be paying around £1 billion a year too much.
"We could not ignore this clear and unequivocal finding and have
taken quick and decisive action which will ensure that consumers get
a fair deal when they buy a new car.
"The Order that I am publishing today will establish a fair framework
for supply to dealers and more effective competition in the new car
market including measures to enable dealers to buy cars outright at
cheaper prices.
"It is up to suppliers and dealers to deliver more competitive prices
to consumers and to convince them that they are offering good value
for money. This is the way to restore consumer confidence.
"I have set the industry a demanding timetable. All the provisions of
the Order will come into force on 1 September.
"While I appreciate that the car manufacturers need time to prepare
so that they can comply with the Order, I believe it is more
important for the industry to bring prices down quickly and give
consumers the confidence to buy.
"I am pleased that prices have fallen recently and a number of
special offers are available. But I believe we need to make sure
that prices come down and stay down across the board.
"It was clear that the car market was not operating effectively.
Greater competition will also bring about a healthier industry."
The Order will:
* Require suppliers to offer dealers who buy cars outright similar
volume discounts to those offered to fleet buyers;
* stop suppliers from discriminating in respect of discounts when
supplying cars to a contract hire company according to whether the
end-user is a private or fleet buyer;
* stop suppliers from discriminating against or refusing to supply
dealers because of the dealer's advertised resale prices;
* stop suppliers from agreeing to pay bonuses or give preferences to
dealers on the grounds of the number of cars pre-registered by the
dealer;
* require suppliers to publish information about the number of cars
they have pre-registered; and
* ensure that sales of cars obtained from authorised dealers in other
EU Member States count towards dealers' annual sales targets,
performance against which can affect whether a dealer keeps it's
franchise.
The Director General of Fair Trading will continue to monitor the
market and compliance with the Order. If it is found that the
measures in the Order need to be reinforced, the Secretary of State
will consider what changes, if any, are necessary, including a ban on
recommended retail prices.
The Competition Commission made a number
of adverse findings
concerning the practices of suppliers in relation to the supply of
new cars. Under section 56 of the Fair Trading Act 1973, the
Secretary of State has the power to make an Order to remedy the
adverse effects identified by the Competition Commission in a
monopoly report.
6)
Explain the restrictive practices that Byers was attempting to prevent.
Analyse the likely impact of the Order on price, employment, market structure
and output in the UK car industry.
(10 marks)
7)
How does regulation of private sector utilities (electricity, gas water
etc) differ from that of other industries?
(3 marks)
8)
What is meant by privatisation? Outline the different ways in which the
private sector can play an increase role in formerly public sector dominated
areas.
(7 marks)
9)
Since 1979 successive Governments have sought to increase the role of the
private sector in most areas of the economy. Outline the reasons for such a
move.
(5 marks)
10)
Discuss the likely impact of a progam of privatisation on competition,
efficiency consumer choice and prices
(9 marks)
Privatisation Issue 3: The UK Experience
By Simon Leary, Director of Privatisation Services,
PricewatershouseCoopers Thailand
Although governments have sold state
assets from time to time throughout history, such transactions became widely
known as privatisation only after the election of Prime Minister Margaret
Thatcher in the United Kingdom in 1979.
Nevertheless, what in retrospect seems like a coherent and regimented march
towards market based reforms was in fact far more haphazard and piecemeal than
is sometimes realised.
Battle was joined in the mid 1970s when the then Labour (socialist) Government
was forced to admit its economic failings by calling in the IMF.
Meanwhile, the ideological powerhouse of progressive UK conservatism (the
independent Centre for Policy Studies) launched a pamphlet in 1975, which summed
up the argument for public sector reform. Titled, 'Why Britain needs a Social
Market Economy".
It opened:
"There is now abundant evidence that state enterprises in the UK have not
served well either their customers, or their employees, or the taxpayers. For
when the state owns, nobody owns; and when nobody owns, nobody cares."
Opinion polls increasingly showed that nationalised industries and the antics of
their more militant employee unions were increasingly unpopular. This led the
Conservatives to ride the wave of public discontent and opine:
"The long term aim must be to reduce the preponderance of state ownership
and widen the base of ownership in our community. Ownership by the state is not
the same as ownership by the people."
Nevertheless, when the Conservatives came to power in 1979 on the back of a wave
of discontent with state based economic policies and militant labour unions the
word privatisation was still not common currency.
The new Government's programme envisaged only limited denationalisation and
there was certainly no master-plan to reshape the economy as has subsequently
often been assumed.
Not surprisingly, the early privatisation programme proceeded hesitantly, with
ongoing debate about the necessary extent of reform, the methods to be used and
the limits of what could and could not be sold ongoing both in the ruling party
and the country at large. In addition, necessary legislation had to compete for
parliamentary time with other pressing legislative commitments.
A little acknowledged landmark was the public sale of 51.6% of British Aerospace
in 1981. This was significant for several reasons:
- It was an industry which had been nationalised for strategic reasons as too
important for the private sector to own
- It was offered straight to the capital markets (a first)
- Employees and the public bought a significant proportion of the shares
- The shares sold at a premium and headlined privatisation as good news for the
investor, the employees and the national economy
The Government gradually began to realise that it had the makings not only of an
efficient tool for economic management but the basis for a popular campaign.
Conventional political wisdom, in government, increasingly saw that
privatisation could offer greater economic freedom, empowered consumers,
improved goods and services, increased efficiency and competition, depoliticised
pay negotiations and reduced state borrowing requirements.
Early sales of companies requiring limited restructuring such as Cable &
Wireless and the National Freight Corporation proceeded. Meanwhile, government
and its supporters in free market orientated think-tanks, began to consider the
potential for more fundamenetal reforms.
The sale of British Telecom in 1984 is generally accepted as the watershed in
the development of privatisation policy worldwide.
Its success demolished so many statist myths that it is hard to know where to
begin. Here are a few:
- It showed that harnessing the power of the individual citizen as investor
could enable the most cash strapped capital markets to absorb enormous inflows
(GBP3.9billion for BT) and that the size of domestic capital markets was no
barrier to major utilities being floated
- Proved the existence, capacity and widespread appetite of small investors
(over 2.3 million Uk citizens bought BT shares and the offer was 9.7 times
oversubscribed) to participate in such sales
- The handsome premiums investors could expect on offer prices ( a tool often
used since to encourage small investors)
- Indicated that effective regulation could impose "virtual" competitive
pressure on monopoly providers, safeguarding consumers and fostering new service
providers
- Opened the flood-gates to similar sales in gas, steel and latterly
electricity, water and coal.
During the remainder of the 1980s marketing techniques were refined, pricing
issues debated, industry models reviewed and regulatory mechanisms developed but
the sale of Telecom and the subsequent sale of British Gas in 1986 showed that
there was no turning back.
This is not least because the BT sale showed that whilst service has improved
and choice has been expanded, prices have actually dropped and employment in the
UK telecoms sector has increased significantly since BT was privatised.
The privatisation of the water (1989) and electricity industries (1990) in
England and Wales marked another major step in the process of reform.
Previously considered "natural" monopolies innovative industry structures
combined with effective market and regulatory institutions to demonstrate that
there were no insurmountable barriers to privatising major utilities whilst
safeguarding public and national interest.
Even in rail, where as late as 1990 conventional wisdom scoffed at the concept
of a workable privatisation has seen the wholesale transfer of the UK's rail
infrastructure and service provision back to the private sector, from whence it
came.
New territory
At the end of the century, the UK continues to pioneer privatisation. Schemes
for harnessing private investment and service provision have now been introduced
in healthcare, education, even the military whilst previously "taboo" industries
such as nuclear power have been taken to the market without incident.
20 years on with over a US$60billion in revenues raised, over a million
employees transferred to the private sector, millions of new jobs created and
countless billions in new business generated by the drive to efficiency and
productivity which privatisation has engendered. There are few who regret the
passing of the state monopolies which failed Britain so badly.
(GBP=£)
In the light of recent experiences, and
discussions of Public Private Partnerships in rail and air traffic control, to
what extent do you agree with this assessement of the UK's privatisation
program?
(15 marks)
(65 marks)
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